For the buyer of an option, the premium paid is considered which of the following?

For the buyer of an option, the premium paid is considered which of the following?

• A. Leveraged price
• B. Maximum risk
• C. Maximum reward
• D. Breakeven point

Answer: (B)

For the buyer of an option, the premium paid represents the maximum risk incurred in the transaction. This is because the premium is the upfront cost that the buyer pays for the right, but not the obligation, to buy or sell the underlying asset at a predetermined price before the option expires. If the market does not move in the buyer's favor, they can choose not to exercise the option and will only lose the premium paid. In contrast, while the concept of leveraged price refers to the use of a smaller amount of capital to control a larger position, it does not directly relate to the premium itself. The maximum reward of purchasing an option is potentially unlimited in the case of call options (if the underlying asset increases significantly in price), or substantial in the case of put options (if the asset decreases significantly). However, this potential for profit does not affect the premium as the buyer's maximum risk remains the total premium paid. The breakeven point for the option buyer is where the price movement offsets the cost of the premium but is not directly indicative of the risk associated with the premium itself.

For the buyer of an option, the premium paid represents the maximum risk incurred in the transaction. This is because the premium is the upfront cost that the buyer pays for the right, but not the obligation, to buy or sell the underlying asset at a predetermined price before the option expires. If the market does not move in the buyer's favor, they can choose not to exercise the option and will only lose the premium paid.

In contrast, while the concept of leveraged price refers to the use of a smaller amount of capital to control a larger position, it does not directly relate to the premium itself. The maximum reward of purchasing an option is potentially unlimited in the case of call options (if the underlying asset increases significantly in price), or substantial in the case of put options (if the asset decreases significantly). However, this potential for profit does not affect the premium as the buyer's maximum risk remains the total premium paid. The breakeven point for the option buyer is where the price movement offsets the cost of the premium but is not directly indicative of the risk associated with the premium itself.