Question

A call option with a strike price of 55$ can be bought fo $4 what will be your net profit if you sell the call and the stock price is 52$ when the call expires?

Can you please elaborate on the answer. thanks

Answer 1

A call is an option conract that gives the buyer the right to buy the underlying asset at the strike price at any time up to the expiration date. This strike price is the price at which an option buyer can buy the underlying asset. For example, a stock call option with a strike price of $25 means the option buyer can use the option to buy that stock at $10 before the option expires. The call buyer has the right to buy a stock at the strike price for a set amount of time. if the price of the underlying moves above the strike price, the option will be worth money. The trader can sell the option or excercise the option at expiry. For these rights, the call buyer pays a "premium"

In the given case, our net profit will be $4 i.e. the premium amount because we are the seller and in case the price had gone above $55 then only we will have to compensate the call buyer. Now, as the stock price is less than strike price the call buyer will not excercise the option and would like to buy the shares from market at prevailing rate.