Question

The recession has caused car owners to defer a new car purchase and keep their existing car. thus, analysts do not expect automotive stocks to rise for the next few months. you plan to profit from this by taking a short position in a call option on borgwarner inc., the car parts manufacturer. shares of borgwarner are currently trading for $80. you write a call option that expires in nine months and has a strike price of $85. the option is trading for $5. at maturity, what is the profit of this call writing strategy if borgwarner's stock price is $80?

Answer 1

If BorgWarner's stock price is $80 at maturity, the call option expires worthless and the writer's profit is equal to the premium collected, which is $5 per share.

Step-by-step explanation:

To determine your profit from writing a call option on BorgWarner Inc., we consider the scenario where the stock price at maturity is equal to $80, which is also the current trading price. Since the strike price of the call option is $85, the option will expire worthless because the option holder would not exercise the option to buy the stock at $85 when it can be purchased on the market for $80. As the writer of the call option, you would keep the entire premium paid by the buyer, which is $5 per option. Therefore, your profit would be the premium collected, which is $5 per share.