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A short call option is sold for 1,460 dollars and covers 100 shares of Johnson Incorporated....

A short call option is sold for 1,460 dollars and covers 100 shares of Johnson Incorporated. If the Strike price of the option is 70, what is the break-even share price?

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Expert Solution

Call option is the option of upward movement of stock. It means if the stock price is high the difference of the stock price and exercised price will be the payoff. The person who buy the Call option (i.e. Long on call option) will get the money if the stock price increased and the person who has short the call option will have to pay.The benefit of short option is the amount of premium he received from shorting the call and his profit is also limited to the premium he collected.

In the given case,

We have short call option.

Which means we have received $1,460 as premium fro 100Shares.

Premium for 1 shares = $14.60 ($1460 / 100 )

Strike price for the Call option is $70, which means that if the price of stock increases from $70 we have to pay the difference of increased amount.

Break even share price will be = Strike price + Premium we received from short call option.

Break even share price will be = $70 + $14.60

Break even share price will be = $84.60.

Which means that if the stock price becomes $84.60 at the maturity of call we will pay the difference of strike price and current price which is $14.60 ($84.60 - $70 ) and that is the same amount which we have received, soo in that case we neither have any profit nor any loss.

Please hit the thumps up if you find it helpful and feel free to comment your query if any. Thank you

jeff jeffy answered 1 year ago
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