The Standard & Poor’s Depositary Receipts (SPDRs) is an exchange-traded fund in

Question

The Standard & Poor’s Depositary Receipts (SPDRs) is an exchange-traded fund in the United States that is designed to track the S&P 500 stock market index. The current price of a share of SPDRs is $113. A trader has just bought call options on shares of SPDRs for a premium of $3 per share. The call options expire in five months and have an exercise price of $120 per share. On the expiration date, the trader will exercise the call options (ignore any transaction costs) if and only if the shares of SPDRs are trading: A. Below $120 per share. B. Above $120 per share. C. Above $123 per share.
Please select the right answer above and Explain Why? The Standard & Poor’s Depositary Receipts (SPDRs) is an exchange-traded fund in the United States that is designed to track the S&P 500 stock market index. The current price of a share of SPDRs is $113. A trader has just bought call options on shares of SPDRs for a premium of $3 per share. The call options expire in five months and have an exercise price of $120 per share. On the expiration date, the trader will exercise the call options (ignore any transaction costs) if and only if the shares of SPDRs are trading: A. Below $120 per share. B. Above $120 per share. C. Above $123 per share.
Please select the right answer above and Explain Why? The Standard & Poor’s Depositary Receipts (SPDRs) is an exchange-traded fund in the United States that is designed to track the S&P 500 stock market index. The current price of a share of SPDRs is $113. A trader has just bought call options on shares of SPDRs for a premium of $3 per share. The call options expire in five months and have an exercise price of $120 per share. On the expiration date, the trader will exercise the call options (ignore any transaction costs) if and only if the shares of SPDRs are trading: A. Below $120 per share. B. Above $120 per share. C. Above $123 per share.
Please select the right answer above and Explain Why?

Explanation / Answer

correct answer : B

The break even Price = $120 (exercise price ) + $3 (call premium) = $123

But price trades above $120 but less than , he can reduce his loss.

For example, if the stock price is $122, the option buyer would exercise the option to make $2 = $122 - $120 per share, resulting in a loss of $1 = $3 - $2 after considering the premium. It is better to exercise and have a loss of only $1, however, rather than not exercise and lose the entire $3 premium.

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