Question

Consider a call option with an exercise price of $75 which Sells for $4.50. Draw the profit diagram for a long position in this option at expiration. Be sure to label the maximum profit, maximum loss and break-even.

Answer 1

The profit diagram for a long position in this option at expiration is shown below.

Exercise price, X = $20

Call price = $1.25

Profit of a long call position is given by:

Profit = max(St - X, 0) - Call price

St = Stock price at expiration

The maximum profit of a long call option is unlimited because as the stock price keeps increasing the profit also increases. The maximum loss of a long call option is equal to the call price.

Break-even price = Exercise price + Call price

Break-even price =75 + 4.50

Break-even price = $79.50