Call option Personal finance problem Carol Krebs is considering buying 100 shares of Sooner Products,...
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Finance
Call option
Personal finance problem
Carol Krebs is considering buying 100 shares of Sooner Products, Inc., at $68 per share. Because she has read that the firm will probably soon receive certain large orders from abroad, she expects the price of Sooner to increase to $76 per share. As an alternative, Carol is considering the purchase of a call option for 100 shares of Sooner at a strike price of $65. The 90-day option will cost $800. Ignore any brokerage fees or dividends.
a.What will Carol's profit be on the stock transaction if its price does rise to $76 and she sells?
b.How much will Carol earn on the option transaction if the underlying stock price rises to $76?
c.How high must the stock price rise for Carol to break even on the option transaction?
d. Compare, contrast, and discuss the relative profit and risk associated with the stock and option transactions.
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