Question

Joe Brown purchased a call option on Cisco stock with a strike price of $40 for a premium of $2 per share.

1) Before the option expires, Cisco stock price is $44. Will Joe strike or not? What would be his profit/loss? What is the return rate on his investment on the option trading (ignore the money used in purchasing stocks)? Is this not strike? since X>S, and call option

2) Assume instead, the price of Cisco stock is $39. Will he strike or not? What would be his profit or loss from the option trading?

3) What is the minimum stock price at which Joe should exercise the call option?

4) At what stock price will Joe breakeven (profit/loss=0)?

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

X= 40

Co =2

Call option:

When share prices about strike price then the call option is in the money, otherwise, it is out of money.

In the Money Profit:

Call option: (CURRENT PRICE- STRIKE PRICE)- PREMIUM

1. S= 44

As S>X, Joe will strike.

Profit = (44-40)-2 = $2

Return = profit/premium = 2/2 = 100%

2. As S<X, Joe will not strike.

Loss = premium = 2

3. Any price above $40. Minimum price = $40.01

4. Break even = X+Co = 40+2 = 42.