A three-month call option is the right to buy a stock at $20. Currently the stoc

Question

A three-month call option is the right to buy a stock at $20. Currently the stock is selling for $22 and the call is selling for five dollars. You are considering buying 100 shares of the stock ($2200) or one call option ($500).

A) the price of the stock rises to $29 within three months what would be the profits or losses on each position? What would be the percentage gains or losses?

B) if the price of the stock declines to $18 within three months, what would be the profits or losses on each position? What would be the percentage gains or losses?

C) if the price of the stock remains stable at $22, what would be the percentage gains or losses at the expiration of the call option?

Explanation / Answer

buy 100 shares of the stock ($2200) A B C current price 29 18 22 cost per share 22 22 22 gain per share 29-22=7 18-22=-4 22-22=0 amount of shares 2200/22=100 2200/22=100 2200/22=100 total gains 7*100=700 -4*100=-400 0 percentage gains 770/2200=31.82% -400/2200=-18.18% 0 ? buy one call option ($500) A B C current price 29 18 20 exercise price 20 20 20 earning per share max(29-20,0)=9 max(18-20,0)=0 max(20-20,0)=0 cost of options 500 500 500 amount of options 500/5=100 500/5=100 500/5=100 total gains 9*100-500=400 0-500=-500 0-500=-500 percentage gains 400/500=80% -500/500=-100% -500/500=-100%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.