Although the potential loss incurred from purchasing a call option is finite, the potential loss to...

Although the potential loss incurred from purchasing a call option is finite, the potential loss to the seller is unbounded. Explain why the potential loss that the seller may incur is unbounded.

Expert Solution

A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option.The buyer of the call option has the right, but not the obligation, to buy an agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price).

the potential loss that the seller may incur is unbounded because buyer has fix the strike price in advance so if the price gone up by strike price it gave loss to the seller and this price is gone by any amount.

ekkarill92 answered 2 years ago

What are the maximum gain and maximum loss to a trader that buys a call option?

Draw a profit or loss graph for a call option contract with an exercise price of...

Draw a profit or loss graph for a call option contract with an exercise price of $50 for which a $5 premium is paid. You may assume the underlying asset’s price is as low as $10 and as high as $80 (in even multiples of $10) and that the option is being evaluated on its expiration date. Calculate and identify the breakeven point, maximum profits and maximum losses.

1. What is a call option? Pick a specific call option on IBM from the link...

1. What is a call option? Pick a specific call option on IBM from the link above and detail how you could make money if the value of IBM stock increased. Use specific numbers. What would happen to your investment if the price of IBM fell?

On August 15, 2014 XYZ Inc. made an investment by purchasing a call option on ABC...

On August 15, 2014 XYZ Inc. made an investment by purchasing a call option on ABC Inc common shares for $360. The notional value of the call option is 400 shares and the option price is $40 (Market price of ABC is $40). The option expires on 1/31/15. The following data applies with respect to the call option. Date Market Price of ABC Shares Time Value of Call Option 9/30/14 $48/share $180 12/31/14 $46/share $65 1/15/15 $47/share $30 Prepare journal...

Suppose you buy a straddle by purchasing one Clearwire August $50 call option contract quoted at...

Suppose you buy a straddle by purchasing one Clearwire August $50 call option contract quoted at $4 and also purchasing one Clearwire August $50 put option contract quoted at $5, where $50 is the strike price for both options. The two options have the same expiration date. (a)(6 points) If the Clearwire stock price is $30 at expiration, what is yourpayoff from the call option, your payoff from the put option, and yourtotal payoff from the straddle? What is your...

Calculate the call option value at the end of one period for a European call option...

Calculate the call option value at the end of one period for a European call option with the following terms: The current price of the underlying asset = $80. The strike price = $75 The one period, risk-free rate = 10% The price of the asset can go up or down 10% at the end of one period. What is the fundamental or intrinsic value? What is the time premium?

A call option with strike price of $100 sells for $3 whereas a call option with...

A call option with strike price of $100 sells for $3 whereas a call option with strike price of $106 sells for $1. A ratio spread is a portfolio with the following characteristics: long on one call with Strike K1, shirt on 2 calls with Strike K2 (where K2>K1), Thsm, you create a ratio spread by buying one call option with the strike price of $100 and writing two call options with the strike price of $106. 1) perform a...

You buy a call option and you buy a put option on firm DFE. The call...

You buy a call option and you buy a put option on firm DFE. The call option has a strike price of $50 and you pay a premium of $4. The put option also has a strike price of $50 and you pay a premium of $4. Both options expire at the same time in three months from now. 20. You are betting that the stock price of DFE: A) Will remain fairly constant B) Will increase by a large...

Exercise 17-27 On August 15, 2016, Marigold Co. invested idle cash by purchasing a call option...

Exercise 17-27 On August 15, 2016, Marigold Co. invested idle cash by purchasing a call option on Counting Crows Inc. common shares for $594. The notional value of the call option is 660 shares, and the option price is $66. The option expires on January 31, 2017. The following data are available with respect to the call option. Date Market Price of Counting Crows Shares Time Value of Call Option September 30, 2016 $79 per share $297 December 31, 2016...

Exercise 17-27 On August 15, 2016, Splish Co. invested idle cash by purchasing a call option...

Exercise 17-27 On August 15, 2016, Splish Co. invested idle cash by purchasing a call option on Counting Crows Inc. common shares for $504. The notional value of the call option is 560 shares, and the option price is $56. The option expires on January 31, 2017. The following data are available with respect to the call option. Date Market Price of Counting Crows Shares Time Value of Call Option September 30, 2016 $67 per share $252 December 31, 2016...

Question