question archive Suppose you believe that Basso Inc
Suppose you believe that Basso Inc
Subject:BusinessPrice:2.87 Bought7
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?
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Answer:
Net profit of a long call option = max(St - X, 0) - Premium paid
St = $45
X = $25
Premium paid = $3.10
Net profit = max(45 - 25, 0) - 3.10
Net profit = max(20, 0) - 3.10
Net profit = 20 - 3.10
Net profit = $16.90
The pre-tax net profit will be $16.90
