The current price of a stock is $40, and two-month European call options with a
ID: 2820845 • Letter: T
Question
The current price of a stock is $40, and two-month European call options with a strike price of $43 currently sell for $5. An investor who feels that the price of the stock will increase is trying to decide between two strategies: buying 100 shares or buying 800 call options (8 contracts). Both strategies involve an investment of $4,000 a. Which strategy will earn more profits if the stock increases to $42? b. How high does the stock price have to rise for the option strategy to be more profitable? Please choose all correct answers. Please note that each incorrect answer wil reduce the score by 10%. 1If the stock closes at $42, buying100 shares will have a profit of $200 and buying 800 calls will have a loss of $3,000. So buying stocks w be better than buying options 2.The option strategy is more profitable if the stock price rises above $43.45 if the stock closes at $42, buying100 shares will have a profi of s200 and buying 800 calls will huave a loss of $4,000. So buying stocks wll be better than buying options 4.The option strategy is more profitable if the stock price goes below $47.94 S. The option strategy is more profitable if the stock price rises above 549.14 6 if the stock closes at $42, buying100 shares will have a profit of $200 and buying 800 calls will have a loss of $2,000 So buying stocks l be better than buying options itf the stock closes ar $42 buying 00 shares will haive a profie or $200 and buying 8000 cals will have a proft of $2000. So buying ca options will be better than buying stocks & The option strategy is more proftable if the stock price rises above $45.78 5 6 commandoption mmandExplanation / Answer
Answer a:
Call options are the agreement that give the option buyer the right, but not the obligation, to buy a stock at a specified price within a specified time period.
A call buyer profits when the spot price is more that the strike price.
The pay off for a call buyer = (Spot price - strike price) - Option price (if Spot price > Strike price)
if spot price < Strike price, then option buyer may not exercise his rights and has to pay the option price.
Buying stock 100:
Buying price = 40
Current price = 42
Total profit = (42 - 40)*100 = $200
Buying Call Option: 800
Strike price = 43
Current price = 42
Option price = 5
Since Current price < Strike price, The loss for option buyer will be = 5*800 = $4000
Option 3 is the correct choice.
Answer b:
Lets assume, the spot price is = x
Call option strategy will be profitable, when [(x - 43) - 5] * 800 = (x - 40)*100
By solving the equation, we get x = 49.14
The option strategy will be profitable if the stock price is above $49.14
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.