For the buyer of a call option, the downside risk
A) is unlimited, but upside potential is limited.
B) is limited, but upside potential is unlimited.
C) and upside potential are unlimited.
D) and upside potential are limited.

Question

Quizplus · Accepted Answer

The buyer of a call option pays a premium for the right to buy the underlying asset at a predetermined price (strike price) on or before a specified expiration date. The maximum loss for the call option buyer is limited to the premium paid for the option.

On the other hand, the potential profit for the call option buyer is unlimited because the price of the underlying asset can increase without any limit. Therefore, the downside risk for the buyer of a call option is limited, while the upside potential is unlimited. Option B correctly describes this scenario.

For the Buyer of a Call Option, the Downside Risk