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Question
a three-month call option with a strike price of $30 is
currently selling for $4 when the price of the underlying stock is selling for $32.
a. what is the call's intrinsic value?
b. what is the time premium?
c. what is the maximum possible loss to the buyer of the call?
d. what is the maximum possible profit to the seller of the option?
e. would you buy the call if you expected the price of the stock to fall?
three months later the stock is selling for $39.
f. what is your profit or loss from buying the stock?
g. what is the option's intrinsic value?
h. what is your profit or loss from selling the call?
i. if you let the option expire, what do you receive?
j. what are the percentage returns you earned on investments in the call and in the stock?
k. if the price of the stock had been $30 at the option's expiration, what would have been the percentage returns on investments in the call and in the stock?
l. what is the primary reason for purchasing a call instead of the underlying stock?
Answer
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