Question

You bought Stock A at a purchase price of: Call option strike price: Option expiration date: Price of call option: $25 $35 June 30, 2020 $5 Stock goes up to $50 Stock goes down to $5 A. Profit/Loss on stock if sell now B. Profit/Loss on call option if sell now All other things being equal, would you expect the price of the call option to be higher or lower than $5 for a stock that is identical to Stock A in all respects except: C. The stock has higher volatility than Stock A? Is it higher or lower? D. The expiration date of the call option is July 31, instead of June 30? Is it higher or lower?

Answer 1

A) ) profit / loss on stock tin stock goes up to $50. profit & salevalue- purchase peic = $50-$25= $25 ( Stock goes down to $5 Los = sale value- purchase peia = $5 - $ 25 loss = $20

B protot) 1085 on call option i) stock goes upto $50. Net pay off - sale value of stock - call option eremium strike - lofcay prica option - $50-$35-$50 = $10 min (i) stock goes down to $5... If Stock goes to $5 the holder of call option with a strike pocice of $35 will Lapse the call option. If he lapses the call option, then maximum loss a premium on call that he paid to acquire the coll option loss = $5.

price of call option , also called as premium on call option is price we pay to obtain the right to buy a stock. À more volatile stock will have I higher call premium. The writer of good call option will Charge more compensation for the challenge he faces to estimate the expected future spot price of volatile stock in the form of high "Premium". : . If stock that is more volatile than stock - A. then its price of call option will be higher the price of call option of stock The stock which is identical in all respects but man has more volatility than stock : A will has a premium of more than $5, which is I higher than premium of call option of stock : A

D call premium will decline as the expiration date of an option approaches, The chance that an investor makes money out of call option will decrease when there is less time an option has until its expiration date If a stock which is identical to stock: A in all respect but it has expiration date of July 3), instead of June 30, then that stock will has higher to stock will be priced at a higher rate than stock = A. . If a stock has high longer expiration date than stock r its price of call option will be more than 15, which is higher than price of call option of stock: A