If the option is traded at a lower premium


Would someone mind breaking this down for me? How would you figure things out mathematically? There’s something fundamental I’m missing with these types of questions :frowning:

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Hi @Matthew,

In this question, the investor bought a call. It doesn’t say the amount of the premium, but let’s assume they bought it for $10.

When they trade the option later, they’ll sell it to someone else and earn the new premium - so they want the new premium to be as high as possible:

  • If the new premium decreased to $7, they would have a capital loss: -$10 + $7 = -$3
  • If the new premium increased to $13, they would have a capital gain: -$10 + $13 = $3

It’s basically the opposite of this one: Question discrepancy, potentially? - #2 by Justin