Go to the website http://www.optionsplaybook.com/rookies-comer/learn-options-tra

Question

Go to the website http://www.optionsplaybook.com/rookies-comer/learn-options-trading/and read "GETTING YOUR FEET WET'. What is a common mistake that rookie option investors often make? Answer in one sentence or less. A speculator buys a call option for S4, with an exercise price of $20. The stock is currently priced at $21. At what price would the speculator break even? A speculator buys a call option for $4, with an exercise price of $20. The stock is currently priced at $21. and rises to $26.50 on the expiration date. What is the speculator's S profit per unit? A speculator buys a call option for $4, with an exercise price of S20. The stock is currently priced at $21, and rises to $26.50 on the expiration date. What is the return to the speculator? A speculator buys a call option for S4: with an exercise price of S20. The stock is currently priced at $21, and drops to SI 8.50 on the expiration date. If the speculator still holds the option on expiration what is the S loss per unit? A speculator buys a call option for $4, with an exercise price of S20. The stock is currently priced at $21. This call option is the money? on out of in at beside circumnavigating perpendicular to parallel to

Explanation / Answer

E2: Break Even Point = Exercise Price + Call Premium
                                          = $20 + $4 = $24

E3: Profit = Spot price on expiration – Strike Price – Call Premium
                   = $26.5 - $20 - $4 = $2.5

E4: Return to the speculator = $2.5/$4 = 62.5%

E5: If the spot price is less than exercise price, the option will not be exercised and the loss will be the premium paid. So, the loss in this case is $4.

E6: C. In the money

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