Unlimited profit?

Quantitative Finance Level 1

True, False or It depends?

If you own a call option on a stock, your potential profit is unlimited.

True It depends on the expiry It depends on the strike False

3 solutions

Calvin Lin Staff
Feb 10, 2015

As seen from the graph, if you paid $C$ for the call at the strike $X$ , then the profit on expiry will be $S - X - C$ . Since a stock price is unlimited, this value is not capped.

I answered True becoz 'It looked like if the anwer is not true, you would not have asked the question.'

Agnishom Chattopadhyay - 6 years, 4 months ago

Nope. I'm beginning to like the "True, False or It depends" type of question, as it requires you to understand it well. Future questions will have several "It depends" options.

Calvin Lin Staff - 6 years, 4 months ago

In pure theory, this is correct. In practice it's not-because a stock price doesn't go to infinity.

Jeff Carter - 5 years, 1 month ago

I actually guessed right, I do not know any finance terms as of now. But I thought "Why do people invest heavily in stocks with high hopes?" and I had my answer.

Raghav Vaidyanathan - 6 years, 2 months ago

If the time to expiration is only one day,. Stock price cann't go to infinity in one day. So i disagree with the explanation and answer given.

Winod DHAMNEKAR - 2 years ago

There is theoretically no limit on how high the stock price could go, even with a short expiration time.

Calvin Lin Staff - 2 years ago

Oluseun Arowolaju
Sep 2, 2020

Downside is limited by price of options and no limit on upside.

Bruno Martel
Mar 7, 2021

But is a stock price really unlimited? I mean can you split a stock such as to buy a part of it? because if the stock goes to say a million dollars few people will be able to buy it

and by such your liquidity could be compromised

Bruno Martel - 3 months, 1 week ago

Unlimited profit?

3 solutions

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