CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
An investor buys a call option on a share for a premium of 4 and later lets it expire when the share price is below the exercise price. Relative to the underlying share, the investor's position at expiration is best described as:
The call buyer's loss is limited to the premium paid of 4. The option gives a right but no obligation, so when the share price is below the exercise price at expiration the buyer simply lets it lapse and loses nothing beyond the premium.
- Aa loss limited to the premium paid of 4Correct
- Ban unlimited loss that grows as the share price falls
- Ca loss equal to the exercise price less the share price
Explanation
A call buyer has the right, not the obligation, to buy. If the option is out of the money at expiry it is left unexercised, and the most the buyer can lose is the premium of 4. A loss growing as price falls would apply to a share holder, not the option buyer.
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