Reference no: EM131428889

A call option gives the investor the right, but not the obligation, to purchase a stock at fixed/guaranteed price on specified date of expiration (Ehrhardt, 2017). In order to illustrate the picture, assume that ABC Company is trading at $100 per share, and let's say that you purchase a call option contract on ABC with $100 strike and at price of $2 until November 1st, 2017. The actual cost of this option would be $200 (100*$2). What about if the strike goes up to $105? Since the investor has the right to purchase company's shares at $100, He/she in this case can use the option to buy those shares at $100 and then, immediately sell them for $105 on the expiration date. Hence, the net profit from this trade would be $300 (100* $2 original cost - 100*$5 total sale price).

How about if a company's stock is trading at or below $101? Bu using the same analysis, we will figure out that the call option now is worth less than $200 (amount an investor has spent) and therefore, the buyer will loss his money in this case.

Does it called call options price, why?