You have taken a long position in a call option on IBM common stock. The option

Question

You have taken a long position in a call option on IBM common stock. The option has an exercise price of $149 and IBM?s stock currently trades at $152. The option premium is $4 per contract. a. What is your net profit on the option if IBM?s stock price increases to $162 at expiration of the option and you exercise the option? (Negative amount should be indicated by a minus sign.) Net profit $ per share b. How much of the option premium you payed is due to intrinsic value and how much due to time value? Option Premium Intrinsic value $ Time value $ c. What is your net profit if IBM?s stock price decreases to $142? (Negative amount should be indicated by a minus sign.) Net profit $ per share

Explanation / Answer

Answer:a Net profit=$9 per share

=$162-$149=$13-$4=$9 per share

Answer:b Intrinsic value=$152-149=3

Time value=4-3=1

Answer:c Net profit= -$4 per share

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