Suppose you own a call option that permits you to purchase 100 shares of the stock of Silicon Graphics for $15 per share any time during the next three months. Silicon Graphics has a current market price of $12 per share.
a. Should you exercise the option and purchase the stock if its price increases to $18? What would be your gain (loss) if you exercised the option and then immediately sold the stock?
b. Should you exercise the option and purchase the stock if its price increases to $13? What would be your gain (loss) if you exercised the option and then immediately sold the stock?
c. Would your answer to part (b) change if the option were a put rather than a call? Remember, a put gives you the right to sell stock at a predetermined price.