You have written a call option on Walmart common stock. The option has an exercise price of
Question:
a. How much of the option premium is due to intrinsic value versus time value?
b. What is your net profit if Walmart’s stock price decreases to $ 70 and stays there until the option expires?
c. What is your net profit on the option if Walmart’s stock price increases to $ 80 at expiration of the option and the option holder exercises the option?
Step by Step Answer:
a If the price of the underlying stock is 72 less than the exercise ...View the full answer
Financial Markets and Institutions
ISBN: 978-0077861667
6th edition
Authors: Anthony Saunders, Marcia Cornett
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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