Suppose you believe that Johnson Company's stock price is going to increase from its current level of $22.50 sometime during the next 5 months.For $310.25 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $25 per share.If you buy this option for $310.25 and Johnson's stock price actually rises to $45,what would your pre-tax net profit be?

Question

Quizplus · Accepted Answer

If Johnson's stock price rises to $45, the value of the option to buy at $25 is the difference, which is $20 per share. For 100 shares, this is $2,000. Subtracting the cost of the option, $310.25, gives a pre-tax net profit of $1,689.75.

Suppose You Believe That Johnson Company's Stock Price Is Going