Question

Mary purchased a call option on Apple. The call premium was $2. The strike price is $180. When she purchased the option Apple stock was trading at $170. The option matured today and the stock price is $181. What is her profit/loss? Should she exercise her option?

Answer 1

Call Option:

It gives holder of the option, right to buy the underlying asset but no obligation.

To get this right without any obligation, buyer has to pay some premium.

Here, Mary purchased call option, it means she has taken Long Position on Call option.

Strike Price (X) = $ 180

Call Premium (P) = $ 2

Spot Price on Maturity (S) = $ 181

Now, in case of Long Call, If Spot price on maturity is less than Strike price, do not exercise the option

because asset is available at cheap price in spot market

Similarly, if Spot price on maturity is more than Strike price, exercise the option,

because asset is costly in spot market.

In our case, Spot Price on maturity (S) = $ 181 is more than Strike price (X) = $ 180

So, Mary will exercise the option.

i.e She will buy at (X) = $ 180 & Sell at Spot price (S) = $ 181 in market.

Profit/ Loss = Premium paid + Buy price + Sell Price

= -2 -180 +181

= -1

So, Mary incurred loss of $ 1