Lew paid $300 to purchase a call on Delta stock with a strike price of $25. What does the market price of Delta have to be for Lew to break-even on his option investment? Ignore transaction costs and taxes.
A) $22
B) $25
C) $28
D) cannot be determined from the information provided

Question

Quizplus · Accepted Answer

To break even on a call option, the market price of the stock at expiration must be equal to the strike price plus the premium paid for the option. Lew paid a $300 premium for a call option with a strike price of $25. To find the break-even point, add the premium paid ($300) to the strike price ($25). However, since the premium is in dollars and needs to be converted to a per-share basis, we divide the $300 by the number of shares a standard option contract represents, which is typically 100 shares. Thus, $300 / 100 shares = $3 per share. Adding this $3 to the strike price of $25 gives a break-even market price of $28 per share.

Lew Paid $300 to Purchase a Call on Delta Stock