Assume that cindy peters pays 250 for a 3 month call

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: eated by the issuing firm. Assume that Cindy Peters pays $250 for a 3-month call option on Wing Enterprises, a maker of aircraft components, at a striking price of $50. This means that by paying $250, Cindy is guaranteed that she can purchase 100 shares of Wing at $50 per share at any time during the next 3 months. The stock price must climb $2.50 per share ($250 100 shares) to $52.50 per share to cover the cost of the option (ignoring any brokerage fees or dividends). If the stock price were to rise to $60 per share during the period, Cindy’s net profit would be $750 [(100 shares $60/share) (100 shares $50/share) $250]. Because this return would be earned on a $250 investment, it illustrates the high potential return on investment that options offer. Of course, had the stock price not risen above $50 per share, Cindy would have lost the $250 she invested, because there would have been no reason to exercise the option. Had the stock price risen to between $50 and $52.50 per share, Cindy probably would have exercised the option to reduce her loss...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online