What is the most you can lose answer if you buy a

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What is the most you can lose?
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ANSWER If you buy a call option: Your potential gain is infinite The most you can lose is the option premium
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QUESTION If you write a call option: What is the most you can gain? What is the most you can lose?
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ANSWER If you write a call option: The most you can gain is the option premium Your potential loss is infinite The profit diagram for the buyer and the seller of a call option clearly shows the risks and potential rewards for both:
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QUESTION If you buy a put option: What is the most you can gain? What is the most you can lose?
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ANSWER If you buy a put option: Your maximum potential gain is the strike price minus the option premium The most you can lose is the option premium
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QUESTION If you write a put option: What is the most you can gain? What is the most you can lose?
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ANSWER If you write a put option: The most you can gain is the option premium Your maximum potential loss is the strike price minus the option premium The profit diagram for the buyer and the seller of a put option clearly shows the risks and potential rewards for both:
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IN THE MONEY An option that would give the owner a gain (ignoring the premium) if exercised today is said to be in the money On the expiration date, an option will only be exercised if it is in the money
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EXERCISE A call option on a stock has the following characteristics: Strike price: $50.00 Expiration date: 3 months from now Current stock price: $51.34 Current option premium: $2.02 Is this option currently in the money ?
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SOLUTION Yes The option would give the owner a gain of $1.34 (ignoring the premium) if she exercised it today
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AT THE MONEY If the current price of the underlying is exactly equal to the strike price, the option is said to be at the money
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EXERCISE A call option on a stock has the following characteristics: Strike price: $50.00 Expiration date: 3 months from now Current stock price: $50.00 Current option premium: $2.02
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This option is currently: A. In the money B. At the money
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This option is currently: A. In the money B. At the money
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QUESTION How do you think we would we refer to a situation where the option is not in the money and the current price of the underlying is different from the strike price?
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ANSWER We would say that the option is out of the money
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EXERCISE A put option on a stock has the following characteristics: Strike price: $50.00 Expiration date: 3 months from now Current stock price: $51.34 Current option premium: $2.02
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