Question

An investor sells a European call on a share for $4. The current stock price is $47 and the strike price is $50. (a) Under what circumstances does the investor make a profit (have positive profit) on the expiration date? (b) Under what circumstances will the option be exercised on the expiration date? (c) Please draw a diagram showing how the investor’s profit depends on the stock price on the expiration date. To put it another, draw a diagram showing the relationship between the investor’s profit and the stock price on the expiration date

Answer 1

Answer a) Option will be exercised on the expiration date if Market price on expiry is more than exercise price.

here in the given question Exercise price or the strike price is $50, if the maket price of stock on expiration date is more than 50, let us assume it to be 55, option will be exercised.

Answer b) Investor will make a positive profit if stock price on expiry is more than strike price + option premium paid

here in the given question strike price is $50 and option premium paid is $4, accordingly if market price of stock on expiry will be more than $54

Answer c) Diagram showing relation between investor profit and stock price on expiry is shown in the image attached