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) $45
B) $46
C) $55
D) $50

Question

Quizplus · Accepted Answer

When the stock price is $50 the first alternative leads to a position in the stock worth 100×50 or $5000.The second alternative leads to a payoff from the options of 1000×(50−45)or $5000.Both alternatives cost $4000.It follows that the alternatives are equally profitable when the stock price is $50.For stock prices above $50 the option alternative is more profitable.

A Speculator Can Choose Between Buying 100 Shares of a Stock