Question

Suppose that a December call option on a stock with a strike price of $100 costs $12 and is held until maturity. Please the following three questions.

1. Under what circumstances will the holder of the option make a gain?

2. Under what circumstances will the option be exercised?

3. Under what circumstances will the holder break even?

Answer 1

Suppose that a December call option on a stock with a strike price of $100 costs $12 and is held until maturity. Please the following three questions.

1. Under what circumstances will the holder of the option make a gain?

The holder of the call option will gain if the price of the stock is above $112 on Maturity. This is because the payoff to the holder of the option is, in these circumstances, greater than the $12 as premium paid for the call option. (In the Money)

2. Under what circumstances will the option be exercised?

The option will be exercised if the price of the stock is above $100.00 in March. Though, if the stock price is between $100 and $112 the option is exercised, but the holder of the option takes a loss overall. (In the Money)

3. Under what circumstances will the holder break even?

The break even price is the market price that an underlying asset must reach for an option buyer to avoid a loss if they exercise the option. The break even price for the call option is the $100 strike price plus the $12 call premium, or $112. (At the Money)