Question

When an investor buys a call option, regardless of whether it is an Equity or Stock Index option, the maximum risk or loss potential to the investor is the(A)premium that was paid for the contract plus any out-of-the-money amount(B)premium that was paid for the contract less the in-the-money amount(C)premium that was paid for the contract(D)exercise price on the contract plus the premium paid for the contract

Answer 1

Answer:

C) premium that was paid for the contract

Explanation:

One interesting feature of buying option is that you can only lose the premium.

For example: If i buy the call option for $5 with a strike price of $30. At the expiration date when the stock price is $22, i would have lost more than $5 by exercising the option. The reason is i am purchasing the stock in $30 which can be bought from market in $22. Here, it would not be the case because unlike futures, options can be left not exercised. So, in this condition i will not exercise the option, and buy the stock from market in $22. Maximum i would lose is the premium that i have paid for the option $5.