A call option on ABCD stock, with an exercise price of $50, will either be worth $12 or worthless. The call option has a delta of 0.3. What is the binomial spread of possible stock prices?
A)Low of $22 and high of $62
B)Low of $50 and high of $62
C)Low of $58 and high of $62
D)Low of $38 and high of $62

Question

Quizplus · Accepted Answer

The delta of a call option is the change in the option's price for a $1 change in the underlying stock price. In this case, the delta is 0.3, which means that the option's price will increase by $0.30 for every $1 increase in the stock price.Since the call option is worth $12 when the stock price is $50, it will be worth $12 + (0.30 * (stock price - $50)) for any other stock price.To find the binomial spread of possible stock prices, we need to find the stock prices that make the call option worth $0. This will occur when:$12 + (0.30 * (stock price - $50)) = $00.30 * (stock price - $50) = -$12stock price - $50 = -$40stock price = $10Therefore, the binomial spread of possible stock prices is $10 to $62.

A Call Option on ABCD Stock, with an Exercise Price