True Statements about Call Options at Expiration

D

Let's go through each statement one by one and determine if it is true or false:

A. The call buyer's maximum loss is the call option's premium. This statement is true. As a call option buyer, the maximum loss you can incur is limited to the premium paid for the option. If the option expires out of the money (i.e., the stock price is below the strike price), the buyer will not exercise the option, and the premium paid is the maximum loss.

B. The profit potential to the buyer of the option is unlimited. This statement is true. As a call option buyer, your profit potential is theoretically unlimited. If the stock price rises significantly above the strike price, the buyer can exercise the option and purchase the underlying asset at the lower strike price, allowing them to sell it at the higher market price and make a profit. The potential gain is not capped, unlike the potential loss for the buyer, which is limited to the premium paid.

C. The potential loss to the writer of the call option is unlimited. This statement is false. The potential loss to the writer (or seller) of a call option is not unlimited. The writer's loss is limited but can be substantial. If the stock price rises significantly above the strike price, the writer may be obligated to sell the underlying asset to the buyer at a lower strike price. The writer's loss is limited to the difference between the stock price and the strike price, minus the premium received.

D. The greatest profit the writer of a call option can make is the stock price minus the premium. This statement is true. The writer of a call option's profit potential is limited to the premium received. If the option expires out of the money, meaning the stock price is below the strike price, the writer keeps the premium as profit. The writer's profit is the premium received regardless of the stock price movement.

To summarize: A. True. The call buyer's maximum loss is the call option's premium. B. True. The profit potential to the buyer of the option is unlimited. C. False. The potential loss to the writer of the call option is limited but can be substantial. D. True. The greatest profit the writer of a call option can make is the stock price minus the premium.