A call option’s payoff at maturity time T is CT =max(ST – K, 0). Which...

A call option’s payoff at maturity time T is C_T = max(S_T – K, 0). Which of the following is NOT true about this payoff?

Group of answer choices

The payoff is zero when the stock price at time T is less than or equal to the strike price, i.e., when S_T ≤ K.

The payoff is negative when the stock price at time T is less than the strike price, i.e., when S_T < K.

The payoff is positive when the stock price at time T is greater than the strike price, i.e., when S_T > K.

The payoff can never be negative but the premium paid to acquire the option can be lost.

Expert Solution

C_T = max(S_T – K, 0)

Option B is correct. The statement is NOT TRUE.

The payoff is negative when the stock price at time T is less than the strike price, i.e., when S_T < K.

The payoff is either zero or positive for a long call option at maturity, but never negative.

The other options are incorrect because they are all true statements:

The payoff is zero when the stock price at time T is less than or equal to the strike price, i.e., when S_T ≤ K. The call expires worthless (out of the money)
The payoff is positive when the stock price at time T is greater than the strike price, i.e., when S_T > K. The call option expires in the money.
The payoff can never be negative but the premium paid to acquire the option can be lost. Absolutely true. That's the reason why option B is not true.

jeff jeffy answered 2 years ago

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