In: Finance
2) The current price of a stock is $84. A one-month call option with a strike price of $87 currently sells for $2.80. An investor who feels that the price of the stock will increase is trying to decide between two strategies that require the same upfront cost: Buying 100 shares or buying 3,000 call options (30 call option contracts). How high does the stock price have to rise for the option strategy to be more profitable?
Investor has two options
1) Buying 100 Shares
In this scenario the investor has to spend 84 * 100 = $8400 now to purchase shares.
To be profitable for the investor the share price must move above 84$ only then he can make profit
In this case the investor gains 100 * 1 = $ 100 per ever rupee increase in price.
Movement of stock price should be higher than $84 to be profitable
2) Buying Call option with $87 Strike price
In this scenario the investor has to spend $2.8 * 30 * 100 = $8400 for purchasing 30 call optons
To be profitable for the investor the price of the share should be more than $87 at the time of expiry any thing less than that, then the contract gets cancelled.
since investor has already spent $ 2.8 on call option the effective price should be = 87+2.8 = 89.8 only when the price is above 89.8 then the investor gains profit.
Movement of stock price should be higher than $89.8 to be profitable
Of the two options investor will be more profitable when he purchases the shares now