Question

buy one call option on 1 gold contract (100 oz.).

Exercise Price = $1400/oz

Option Premium = $30/oz

If the price of gold moves to $1350, what is the net option payoff in $

Answer 1

Solution :

A call option will be exercised only if, the Stock price is greater than the Exercise price of the call option.

If the Stock price is lesser than the Exercise price of the call option, the option will not be exercised.

In case of a call option the Intrinsic value of an Option is the Maximum of [ ( Stock price – Exercise Price ) , 0 ]

The payoff of the call option = ( Intrinsic value of the option - Option premium paid ) * Contract Multiplier

As per the information given in the question we have

Exercise price = $ 1400 / oz    ;    Option Premium = $ 30 / oz     ;

Stock price = $ 1350    ;   1 gold contract = 100oz = contract multiplier

Thus the Intrinsic value on call option is = MAX [ ( Stock price – Exercise Price ), 0 ]

= MAX [ ( $ 1,350 - $ 1,400 ), 0 ]

= MAX [ - $ 50 , 0 ]

= 0

Thus the Intrinsic value on call option is = 0

Calculation of Net payoff of call option :

The net payoff of the call option = ( Intrinsic value of the option - Option premium paid ) * Contract Multiplier

We know that

Intrinsic value of the option = $ 0 ; Option premium paid = $ 30   ; Contract Multiplier = 100

Thus the net payoff of the call option = ( 0 - $ 30 ) * 100

= - $ 30 * 100

= - $ 3000

The net option payoff = - $ 3,000