Question

The price of ABCD is $25. You establish the following position: Short 1 ABCD 25 Call...

The price of ABCD is $25. You establish the following position: Short 1 ABCD 25 Call @ 2 If the delta of the call is 0.50, what would be the theoretical price of the option if ABCD increased by $1.00? a. $1.50 b. $2.50 c. $3.00 d. $4.00 e. $4.50

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Answer #1

In this question Delta value is given as 0.50, Underlying price = $25 and exercise price = $25, option premium is equal to 2 per call option.

Theoretical option price = Change in the option premium + Option premium

Delta = Change in option premium / Unit change in price of the underlying

Change in option premium = Delta * change in the price of underlying = 0.50 * $1 = $0.50

Therefore, theoretical price = $0.50 + $2.00 = $2.50

Hence, theoretical price of the option as per given information will $2.50, Hence Option (b) is correct.

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