Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50 sometime during the next 5 months.For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share.If you buy this option for $3.10 and Basso's stock price actually rises to $45, what would your pre-tax net profit be?

Question

Quizplus · Accepted Answer

If Basso's stock price rises to $45 and you have the right to buy at $25, you make $45 - $25 = $20 per share. Subtract the cost of the option, $3.10, to get a net profit of $20 - $3.10 = $16.90.

Suppose You Believe That Basso Inc