Question

I've been studying simulations.

Not sure if you'll be able to answer this question from the information provided, but suppose the strike price of a European call is 52, and the expiration is at the end of 6 days. If I found the closing price on day 6 to be 50.11, would I say that the payoff is 0 (or worthless) since 50.11-52 is not greater than 0?

I also want to know if I could use the present value of 50.11-52 as an approximation to the cost of the call? And how could I derive a better cost?

Step 1

For a call option, if the strike price of the option is 52, and the underlying stock is trading at a price above 52 (on the expiry day), then the intrinsic value of the option will be the price of the underlying stock minus the strike price.

Example: Suppose the underlying stock is trading at $62 (on expiry day) and the strike price is $52, then the intrinsic value of the call option will be $62-$52=$10.

Step 2

Here, the underlying stock is trading at a price below $52 on the expiry day (that is $50.11), so the holder will not exercise the option and it will expire worthless.

Step 3

Present value of 50.11-52 cannot be used as an approximation to the cost of the call because the cost of the call will depend on the current price of the underlying stock, volatility, strike price et...

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