Final answer:
The cost of buying a call option is calculated by multiplying the premium per contract by 100 (since each contract typically represents 100 shares) and then by the number of contracts purchased, ignoring commissions.
Step-by-step explanation:
To calculate the cost of buying a call option without considering commissions, you need to consider the option's premium and the number of contracts purchased. The option premium is the price you pay for the right to buy the underlying asset at the strike price before the expiration date. The cost of one option contract is typically multiplied by 100, as each contract usually represents 100 shares of the underlying stock.
Here is how you calculate the total cost:
- Determine the premium per contract
- Multiply the premium by 100 (assuming one contract represents 100 shares)
- Multiply this amount by the number of contracts you want to purchase
So, if you are buying 10 call option contracts at a premium of $5 per contract, the cost would be calculated as follows:
- Premium per contract: $5
- Total cost for one contract: $5 × 100 = $500
- Total cost for 10 contracts: $500 × 10 = $5,000
Therefore, the total cost of buying the call options, ignoring commissions, would be $5,000.