A day trader buys an option on stock that will return $200 profit if the stock g

Question

A day trader buys an option on stock that will return $200 profit if the stock goes up today and lose $600 if it goes down. Complete parts a and b below given that the trader thinks there is a 70% chance that the stock will go up. a) What is her expected value of the option's profit? b) What do you think of this option? a) The expected value of the option's profit is $ (simplify your answer.) b) What do you think of this option? Choose the correct answer below A. The expected value is positive, so it seems like a good option, B. The expected value is negative, so it doesn't seem like a good option. C. The expected value is negative, so it seems like a good option, D. The expected value is positive, so it doesn't seem like a good option

Explanation / Answer

P(stock will go up) = 0.7

P(stock will go down) = 1 - 0.7 = 0.3

a) Expected profit = 200 * 0.7 - 600 * 0.3 = $ -40

b) Option-B) The expected value is negative, so it doesn't seem like a good option

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