The investment plan is to invest $100,000. Let’s say a local bank X stock is trading at $100 per share, this amount will invest in 1000 shares. Now let’s assume this investor purchases one call option on Bank X with a $100 as strike price and $2.00 per contract. Given that the interest in 1,000 underlying shares represents each options contract, this option actual cost will be equal to $2000 (1000 shares * $2.0 = $2,000).
Under several different scenarios, this is what will happen to this call option value:
Let’s say during the option expiry date, Bank X is trading at $105. Remember, this being a call option, the buyer has only the right to purchase the shares at $100 per share. In this scenario, this investor could buy these shares at this price immediately sell for $105 in the open market. This option could be said to in the money as on expiration date, it will sell at a profit of $5.00. The total sale price will amount to $5,000 as the underlying 1,000 shares are represented each option. Therefore, this option was purchased for $2,000 giving the investor a net profit of $3,000.
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Let’s also assume, as the option expires, Bank X is trading at $101. Apply the same analysis as illustrated below, the worth of the call option will be $1,000. While purchasing this option, the investor spent $2,000 in the first place. As a result, this investment would result in a net loss of $1,000. Under this scenario, the transaction is a wash and thus, the option is at the money.
Lastly, assuming that during the expiration of the option, Bank X is trading at or below the price of $100. If the option ends up at or below this price during expiry, the option contract will expire out of the money.
