Question

A​ 6-month call option on 100 shares of SRS Corp. stock is selling for ​$500. The strike price for the option is ​$30. The stock is currently selling at ​$26 per share. Ignoring brokerage​ fees, what price must the stock achieve to just cover the expense of the​ option? If the stock price rises to ​$38​, what will the net profit on the option contract​ be?

1. Ignoring brokerage​ fees, the price the stock must achieve to just cover the expense of the option is?

Answer 1

1. Call option price per share = $500/100 = $5

The price the stock must rise to cover the cost of call option = Strike price + Call option price per share

The price the stock must rise to cover the cost of call option = 30 + 5

The price the stock must rise to cover the cost of call option = $35

2. Net Profit when St = $48

Profit = max(St - X, 0) * 100 - Total call option price

Profit = max(38 - 30 , 0) * 100 - 500

Profit = max(8, 0) * 100 - 500

Profit = 8 * 100 - 500

Profit = 800 - 500

Profit = $300