3) You like the near term prospect of ABC Company and decide to buy the stock...
3) You like the near term prospect of ABC Company and decide to buy the stock call options. The current stock price is $53. You will buy 10 contracts with $54 strike price and it expires in nine months. The call premium for each share is $1. 6 months later, the stock price increases to $56, Questions: a) What’s the breakeven stock price for the call option? b) What’s the option intrinsic value? c) What’s the option’s payoff? D) Draw an option pay-off diagram;
Homework Answers
a. The break even point of the option = strike price +premium = 54+1.6 = $55.6
b. The options payoff/intrinsic value = number of continents x
(current price-strike price)
=10 x (56-54)
= $20
c. See the diagram attached.
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