Final answer:
Buying an August 165 call option gives the right to purchase stock at $165. There is unlimited profit potential if the stock rises, whereas the maximum loss is limited to the premium paid for the contract. The call is profitable if the stock price exceeds the strike price and premium at expiration.
Step-by-step explanation:
When you buy one August 165 call contract, you are acquiring the right to purchase 100 shares of stock for $165 per share at any time before the option expires in August. The maximum profit for a call option is theoretically unlimited because the price of the underlying stock can rise indefinitely. However, the maximum loss is limited to the cost you paid for the option contract, which is also known as the premium.
If the stock price at expiration is above the strike price plus the premium paid, you will be in profit.
On the other hand, the call buyer will sustain a maximum loss if the stock price is at or below the strike price (of $165 in this case) at expiration, as the option will expire worthless. The loss incurred will be equal to the premium paid for the call contract. No additional money can be lost beyond this initial investment.
- The potential profit of a call option is unlimited because a stock's price can rise indefinitely.
- The maximum loss is limited to the option premium paid.
- Stock prices at expiration affect whether you exercise the option or not.