Call and Put Option Basics Part 1: Calls Suppose you buy a call option on...
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Call and Put Option Basics Part 1: Calls Suppose you buy a call option on Kellogg's stock with X=65, T-18 Dec2015. 1. When you make the purchase, what are you really buying? ANSWER 2. What are you hoping will happen to the price of Kellogg if you were to buy this call? ANSWER 3. Suppose the price of Kellogg's stock at option expiration is $70. What happens to the option? What is your profit on the position? ANSWER 4. Suppose the price of Kellogg's stock at option expiration was instead $55. What happens to the option? What is your profit on the position? ANSWER 70 65 55 65 High Terminal Stock Price Price of Kellogg on 18 Dec 2015 Exercise price Payoff Option price Net profit Low Terminal Stock Price Price of Kellogg on 18 Dec 2015 Exercise price Payoff Option price Net profit 2.69 2.69
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