CFA Level 1 - Derivatives
To obtain these rights, the buyer must pay an option premium (price). This is the amount of cash the buyer pays the seller to obtain the right that the option is granting them. The premium is paid when the contract is initiated.
Q. Which of the following statements about the value of a call option at expiration is FALSE?
A. The short position in the same call option can result in a loss if the stock price exceeds the exercise price.B. The value of the long position equals zero or the stock price minus the exercise price, whichever is higher. C. The value of the long position equals zero or the exercise price minus the stock price, whichever is higher. D. The short position in the same call option has a zero value for all stock prices equal to or less than the exercise price.
A. The correct answer is "C". The value of a long position is calculated as exercise price minus stock price. The maximum loss in a long put is limited to the price of the premium (the cost of buying the put option). Answer "A" is incorrect because it describes a gain. Answer "D" is incorrect because the value can be less than zero (i.e. an uncovered put writer can experience huge losses).