An investor is considering buying 500 shares of ABC Company at $32 per share. Analysts agree that the firm's stock price may increase to $45 per share in the next four months. As an alternative, the investor could purchase a 120-day call option at a striking price of $30 for $5,000. What profit would the investor realize if the stock price increased to $42 per share?

Question

Quizplus · Accepted Answer

If the investor buys the 500 shares at $32 per share, the investment will cost $16,000. If the stock price increases to $42 per share, the investment will be worth $21,000 (500 shares x $42 per share), resulting in a profit of $5,000.

Alternatively, if the investor buys the call option for $5,000, and the stock price increases to $42 per share, the option will be worth $12 per share (42 – 30), resulting in a profit of $7,200 (500 shares X $12 per share - $5,000 option cost).

Therefore, the best choice for the investor would be to purchase the call option and realize a profit of $7,200 if the stock price increases to $42 per share.

An Investor Is Considering Buying 500 Shares of ABC Company