What is the payoff at maturity of a long call below the strike price ?

Question

Question

This question was previously asked in

UGC NET Paper 2: Management 24th June 2019 Shift 2

Answer 1

The correct answer is Zero

Key Points

A call or put option's strike price, also known as the exercise price, is the set price at which the option's owner can purchase the underlying security/ commodity (in the case of a call option) or sell it (in the case of a put option).

An investor considers the price of the underlying security and the strike price since it tells the investor whether or not to execute the contract.
The intrinsic value is basically the worth of an asset, which exists when the price of a stock is more than the strike price. It is zero when the price of a stock is less than or equal to the strike price.
For instance, if the stock is trading at $51 and the underlying call option has a $50 strike price, the investor can exercise the call, buy the stock for $50, and then sell it for $51 to realise $1 of intrinsic value.
But if the call option has a $50 strike price and the stock is selling at $49, the investor will not exercise the call since the intrinsic value will be ZERO.
The investor will not earn profit if the call option's strike price is lower at the time of maturity. Hence, its return will be 0.

Hence, the correct answer is Zero.