Suppose an investor bought a call option for $2.39 on a single share of Beatnik
ID: 2762062 • Letter: S
Question
Suppose an investor bought a call option for $2.39 on a single share of Beatnik Designs Co. with a strike price of $35.00 when the firm's stock traded at $36.24. The call option had one year until expiration. One year later, the stock price had increased to $38.22. The stock price had therefore increases by 5.46%, and an investor who bought the stock and held it for a year would have earned 5.46%. What return did this investor earn by buying the call option?
Suppose the stock price had fallen to $34.23. Indicate the return that a stock investor would have eared by holding Beatnik Design's Co.'s stock. What is the retun that an investor would have earned if she had bought a call option on Beatnik Design Co.'s stock.
Explanation / Answer
Payoff on call option =Max(spot price-strike price-call premium,-call premium)
Spot Price = 38.22
Payoff on call option =Max(38.22-35-2.39,-2.39)
=0.83
Return = (Payoff/call premium)*100
=0.83*100/2.39
=34.73%
Spot Price = 34.23
Payoff on call option =Max(34.23-35-2.39,-2.39)
=-2.39
Return = (Payoff/call premium)*100
=-2.39*100/2.39
=-100%