Question
For a call option with a strike price of ₹80, the
premium paid is ₹4. If the spot price at expiration is ₹90, what is the profit/loss for the option buyer?Solution
- Call Option Buyer's Payoff at Expiry: Max[(Spot Price - Strike Price), 0]
- Profit/Loss for Buyer: Payoff - Premium Paid
Given: Strike = ₹80, Premium = ₹4, Spot at expiry = ₹90.
- Payoff = Max[(90 - 80), 0] = Max[10, 0] = ₹10 .
- Profit/Loss = Payoff - Premium = 10 - 4 = ₹6 Profit .
The buyer makes a net profit of ₹6 per share after recovering the cost of the option (premium).
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