Question

Ned sells a call option on XYZ with a strike price of 25, receiving a premium of $4.25.

Don buys a call option on XYZ stock with a strike price 25 for $4.25. XYZ currently trades for $19 per share. Both traders will make money on their option trade:

a.    If XYZ stock stays between $18 and $25 per share

b.    If XYZ stock is trading at exactly $25 when the call option expires

c.    If XYZ stock is trading at exactly $19 when the call option expires

d.    Under no circumstances

Answer 1

Ned sells a call option with a strike price of $25, he earns a premium of $4,25.

He will want that the stock price remains below the strike price, so that the option buyer does not exercise and the option goes worthless.

Ned sells the call option at the strike price of $25, with a premium of $4.25. He will want that the stock price remain below the strike price and Don will not that the stock price rise above the (stock price + premium paid for the option), to make money from the option.

SO, Don will not make money if the stock price is between $18 and $25. As Don will be losing his premium amount as he wont be profiting from the call option. Ned will profit as the call option buyer,will not exercise,and he will gain the amount of premium paid to him.

When the stock price is at $25,Don will lose his premium amount paid and Ned will gain his premium amount paid to him.As the option buyer will not exercise at the money options. An options is only exercised when it is in the money.

When the stock is trading at $19, again Ned will benefit as the option buyer will not exercise his option and Don will lose the premium paid as he will not exercise his option. This option is out of the money.

So, the correct option is option D, under no circumstances.