Question

In: Economics

An investor holds one share of Tesla stock. The investor purchased the stock at $125. The...

An investor holds one share of Tesla stock. The investor purchased the stock at $125. The current price is now $136. If the investor also purchased an option at the time he bought the share, at a premium of $1, with a strike price of $125, what would the investor prefer to be holding right now? (Please Explain Answer).

call option

put option

either call or put, they have the same profit

$0

Solutions

Expert Solution

a call option gives the investor an option to buy a share at a specified strike price at a specified time in the future.

a put option is a gives the investor an option to sell a share at a specified strike price at a specified time in the future.

In this case, the strike price is $125 and the share price is $136.

if the investor had also bought a call option, he would be able to buy the $136 worth of share for just $125 and by paying a premium of $1, thus making a profit of $(136-125-1) = $10

however, if the investor had also bought a put option, he would not exercise the option as by doing that, he would make a loss of $(125-136-1) = $12. And by not exercising the option and make a loss of $1.

we have clearly seen that the profit of call and put option is not the same.

and he can clearly make a positive profit by holding a call option.

thus, he would prefer holding a call option right now.

Rahul Sunny answered 1 year ago
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