A Three-Month Call Option with a Strike Price of $30

question 50

Essay

A three-month call option with a strike price of $30 is currently selling for $4 when the price of the underlying stock is selling for $32.
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a. What is the call's intrinsic value?
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b. What is the time premium?
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c. What is the maximum possible loss to the buyer of the call?
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d. What is the maximum possible profit to the seller of the option?
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e. Would you buy the call if you expected the price of the stock to fall?
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Three months later the stock is selling for $39.
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f. What is your profit or loss from buying the stock?
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g. What is the option's intrinsic value?
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h. What is your profit or loss from selling the call?
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i. If you let the option expire, what do you receive?
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j. What are the percentage returns you earned on investments in the call and in the stock?
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k. If the price of the stock had been $30 at the option's expiration, what would have been the percentage returns on investments in the call and in the stock?
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l. What is the primary reason for purchasing a call instead of the underlying stock?

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