Stock is trading at 108, Strike is 100 option price is 9 option type call option. What is the upper bound and lower bound of this option ? I have gone through many of the sites but a simple explanation would help me.

Thanks in advance

Stock is trading at 108, Strike is 100 option price is 9 option type call option. What is the upper bound and lower bound of this option ? I have gone through many of the sites but a simple explanation would help me.

Thanks in advance

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Muthu…with the stock trading at 108, 100 Call option is In the Money with an intrinsic value of Rs.8/- (109-100). The addition 1/- is attributed to time value…hence the price of the option is Rs.9 (8+1).

The maximum you can lose is Rs.9/- (lower bound) and the profits can be virtually unlimited (upper bound)

If this option is purchased today at 9 rupees per share. The maximum what you can loose i.e. lower bound is 9 x no. of shares. This happens only the option expires below the value of 100.

If the contract expires today at 108, you loose 1 rupee (You get 8 rupees, you have already paid 9 rupees)

If the contract expires say at 150, you profit for 41 rupees per share, (50 rupees you earn, 9 rupees you have already paid as premium). This value 150 can be anything in upper limit, 170, 180, 200 etc, so you dont have a upper bound. Basically it will be the settlement price on expiry minus your premium.

You can also sell square off your option contract, before expiry as long as you get a premium of more than 9 rupees. This could happen even when the underlying price is at 109 rupees, you option premium could have raised to 9.8 or something, the difference 9.8 and 9.0 = 0.8 rupees per share is your profits.