Option pay-offs: You have sold a call option on news Unlimited shares with a strike price of $40. You do not intend to make any other transactions before the options expiration date. The current share price is $20. Which of the following statements best describes your hopes for the share?

Question

Quizplus · Accepted Answer

When you sell a call option, you are essentially taking the opposite position of the buyer. In this case, since the strike price is $40 and the current share price is $20, it is unlikely that the share price will rise above $40 before the expiration date, meaning that the buyer is unlikely to exercise the option. Therefore, you would hope that the share price stays under $40 so that the option expires worthless and you get to keep the premium. You are indifferent about the direction of the share price, as long as it does not exceed the strike price.

Option Pay-Offs: You Have Sold a Call Option on News