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:______ a. increases to $204 b. increases to $206 c. decreases to $190 d. decreases to $196

Answer 1

b. increases to $206

Step-by-step explanation:

Based on the above information given the holder of the call option will earn a profit if the price of the share increase to 206 because

the price of the stock have to increase to above $205 breakeven which is ($200+$5) in order for the option holder to earn a profit or make a gain.

Hence:

$200 + $5

= $205 (breakeven)

Therefore the holder of the call option will earn a profit if the price of the share increases to $206