The Wireless Electricity Co. sounds like a great company with an unbeatable product. You think that the price will rise so you buy a call option on the company's shares. Shares in Wireless are currently trading for $10.20. A call option on Wireless shares has a strike price of $12 and a premium of $3.01.

a. Draw the profit diagram for a long position in this call option.

b. What is the maximum loss that you could earn on this option if your expectations are not realized? (Consider the y-axis intercept on the profit diagram). Assume that the option contract is for one share only.