Question

Suppose the price of a share of IBM stock is $200. An April call option on IBM stock has a premium of $5 and an exercise price of $200. Ignoring commissions, the holder of the call option will earn a profit if the price of the share increases to $206. increases to $204. None of the options are correct. decreases to $190. decreases to $196.

Answer 1

The holder will earn a profit if the market price increases to $206.

Step-by-step explanation:

The holder of the call option is considered the taking the long position and is known as the long call. The holder of the call option or long call has the right to buy an asset at the strike price. To get this option, the holder has paid a cost known as the premium.

The total cost of call if the holder exercises the option, to holder will be the sum of the premium plus the strike price.

Cost to holder = Strike price + premium paid

Cost to holder = 200 + 5 = $205

The holder will only buy the asset for 200 if its market price is more than 200 and will only earn a profit when the market price is more than the cost to holder ($205).

Thus, the holder will earn a profit if the price of the share increases to $206.