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QUESTION 12 A call option with a strike price of $100 is selling at $5. By...

QUESTION 12

  1. A call option with a strike price of $100 is selling at $5. By obtaining a long position on the call, the maximum gain that can be obtained is:

a.

$95.

b.

$100.

c.

∞.
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Answer #1

Call Option Strike Price = $ 100, Call Premium = $ 5, A long call option has unlimited gains as once the asset price goes above the strike price, the payoffs will be equal to (Asset Price - Strike Price). As is observable, the Asset Price is unlimited in the upward direction whereas the strike price is fixed, thereby making maximum gain equal to infinity.

Hence, the correct option is (c)

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