A three-month call option is the right to buy stock at $20. Currently the stock is selling for $22 and the call is selling for $5. You are considering buying 100 shares of the stock ($2,200) or one call option ($500).

a) If the price of the stock rises to $29 within three months, what would be the profits or losses on each position? What would be the percentage gains or losses?
b) If the price of the stock declines to $18 within three months, what would be the profits or losses on each position? What would be the percentage gains or losses?
c) If the price of the stock remained stable at $22, what would be the percentage gains or losses at the expiration of the call option?
d) If you compare purchasing the stock to purchasing the call, why do the percentage gains and losses differ?

Answer rating: 100% (QA)

An option is the right to buy or to sell stock at a specified ... View the full answer