Question

• Profit/loss for buyers/sellers of call option/put option Breakeven for call option/put option An investor bought 1 XYZ March 30 call for 3. o What is the breakeven point? 3043-33 o What is the initial investment of this strategy? 300 o What is the profit/loss if XYZ trades for 25 at expiration? o What is the profit/loss if XYZ trades for 35 at expiration? o What is the max. profit? P *LP o What is the max. loss? Premium

Answer 1

Ans - Exercise price = 30

Premium = 3

1. Break-even point where there is no loss no profit i.e cost = selling price

breakeven = strike price + premium

= 30 + 3

= 33

2. Initial investment = premium * lot size

suppose the lot size consist of 100 shares

then , 3* 100 = 300

3. If xyz trades for 25 at expiration

call payoff = Max [0, spot price - strike price]

= max [0, 25-30]

=0

loss = sale - cost of premium

= 0 - 3

= -3

There is loss of premium as exercise price is greater than price. So the price of premium remain 0 and there is loss of 3 per share

4.  If xyz trades for 35 at expiration

call payoff = Max [0, spot price - strike price]

= max [0, 35-30]

=5

profit = sale - cost of premium

= 5-3

= 2 per share

There is a profit of 2 per share

5. The maximum profit is unlimited because spot price could be anything at expiration. More spot price, more profit

call payoff = Max [0, spot price - strike price]

6. The maximum loss is the amount of premium paid i.e 3 per share( refer ans 3 equation)