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A speculator can choose between buying 100 shares of a stock for $40 per share and buying 1000 European call options on the stock with a strike price of $45 for $4 per option.For second alternative to give a better outcome at the option maturity,the stock price must be above:_________.A) $45B) $46C) $55D) $50

Answer :

Tundexi

Answer:

D) $50

Explanation:

When stock price = 50

Profit on shares = (Stock price - Purchase price) * Number of shares =  (50 - 40) * 100 = 1000

Profit on call option = Number of options * (stock price - exercise price - premium paid) = 1000 * (50 - 45 - 4) = 1000

Hence when stock price = 50, both the options would yield the same profit but the call option strategy would have an upper hand in profitability for every price increase above the $50 level because then the share buying strategy would yield $100 profit for every $1 price increase whereas the option buying strategy would yield $1000 profit for the same level of price increase.

Hence for the second option to yield higher profit, the stock price should be above 50.

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