Which statement describes a basic option type and its payoff direction?

Which statement describes a basic option type and its payoff direction?

• A. A call option gives the holder the right to sell at the strike price.
• B. A put option gives the holder the right to buy at the strike price.
• C. A call option requires the seller to buy at the strike price.
• D. A call option gives the holder the right to buy at the strike price.

Answer: (D)

The fundamental idea here is how a basic call option works and how its payoff behaves. A call option gives the holder the right to buy the underlying asset at the strike price. That right becomes valuable when the market price rises above the strike, because you can buy at the lower strike and, in effect, capture the difference between the current price and the strike (payoff = max(S − K, 0)). If the price stays below the strike, the option isn’t exercised and the payoff is zero. So the statement that matches this is the one saying a call option gives the holder the right to buy at the strike price. The other descriptions mix up what a call or put actually does or incorrectly assign obligations (for example, a call does not give the right to sell, and the seller is not required to buy at the strike price in a standard call).

The fundamental idea here is how a basic call option works and how its payoff behaves. A call option gives the holder the right to buy the underlying asset at the strike price. That right becomes valuable when the market price rises above the strike, because you can buy at the lower strike and, in effect, capture the difference between the current price and the strike (payoff = max(S − K, 0)). If the price stays below the strike, the option isn’t exercised and the payoff is zero.

So the statement that matches this is the one saying a call option gives the holder the right to buy at the strike price. The other descriptions mix up what a call or put actually does or incorrectly assign obligations (for example, a call does not give the right to sell, and the seller is not required to buy at the strike price in a standard call).