Nico Yong Is Considering the Purchase of 100 Shares of Cisco

question 51

Essay

Nico Yong is considering the purchase of 100 shares of Cisco Systems stock at $22 per share. Because the economy is picking up, Nico believes the demand for Oracle's router systems will increase substantially causing the price of Cisco's shares to increase to $30 per share. As an alternative, Nico is considering the purchase of a call option for 100 shares of Cisco at with an exercise price of $25. This 180 day option will cost Nico $200. Assume no brokerage costs or dividends.
(a) What will Nico's profit be on the stock transaction if he decides to buy the stock and its price does increase to $30 per share and he sells?
(b) How much will Nico earn on the option transaction if he purchases the option and the underlying stock price rises to $30?
(c) How much must the stock price rise for Nico to break even on the option transaction?
(d) Based on parts (a) and (b) above, what should Nico do? Explain.

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Definitions:

Introvert

A personality type that tends to find energy in solitary activities rather than being energized by social interactions.

Personality Research

The study of individual differences in behavior, emotion, and cognition, often exploring traits, attitudes, and goals.

Big Five Model

A personality framework proposing five broad dimensions used to describe human personality, including openness, conscientiousness, extraversion, agreeableness, and neuroticism.

Agreeableness

A personality trait characterized by warmth, kindness, and a cooperative attitude towards others.