Call option Carol Krebs is considering buying 100 shares of Sooner Products, Inc

Question

Call option Carol Krebs is considering buying 100 shares of Sooner Products, Inc., at $62 per share. Because she has read that the firm will probably soon receive certain large orders from abroad, she expects the price of Sooner to increase to $70 share. As an alternative, Carol is considering purchase of a call option for 100 shares of Sooner at a strike price of $60. The 90-day option will cost $600. Ignore any brokerage fees or dividends. What will Carol's profit be on the stock transaction if its price does rise to $70 and she sells? How much will Carol earn on the option transaction if the underlying stock price rises to $70? How high must the stock price rise for Carol to break even on the option transaction Compare, contrast, and discuss the relative profit and risk associated with the stock and the option transactions.

Explanation / Answer

A. carol's profit = 100*(70-62)=$800-$600= $200

B. carol's profit = 100*(70-60)=$1000-$600= $400

C.Break Even Point Is $64 as ther is no profit and no loss  100*(70-64)=$600-$600= $0

D. Option is better as the ebnefit is more asStrike price is also $60

  

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