A call option with a stike price of $100 is selling at $5. By obtaining a short position on the call, determine the breakeven price of the call from the point of the writer.

A) $105

B) $100

C) $95

Can someone help me through this problem??

A call option with a stike price of $100 is selling at $5. By obtaining a short position on the call, determine the breakeven price of the call from the point of the writer.

A) $105

B) $100

C) $95

Can someone help me through this problem??

Remember a call option gives you the right but not the obligation to buy a stock at a given price at a predetermined time in the future (European option) or anytime between two points in time (American option). You must pay the price of the option and then are able to exercise it at the strike price (but will realistically only do so if it is in your favor). Writing a call option is taking a short position on it. You are in essence selling it to another investor. Therefore you receive the price of the option ($5) and will only have to deliver the underlying if it benefits the owner of the call option.

The transaction looks like this. First, you receive the $5 from the buyer of the call option. Second (assuming it is exercised) you receive the strike price. Third you deliver the underlying. Therefore if it were to be exercised you will receive $105 total ($100 strike + $5 price of option) and will pay out the price of the underlying (you must purchase and deliver it). Therefore you will breakeven if the price of the underlying is $105 ($100 strike + $5 option price - $105 underlying = $0).

Hope that clears it up.

Thanks! For some reason it was saying $95 was correct but I picked $105 also.

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