A speculator can choose between buying 100 shares of a stock for $40 per share and buying 1000 European call options on the stock with a strike price of $45 for $4 per option
For second alternative to give a better outcome at the option maturity, the stock price must be above
A. $45
B. $46
C. $55
D. $50
D
When the stock price is $50 the first alternative leads to a position in the stock worth 100×50 or $5000 . The second alternative leads to a payoff from the options of 1000×(50?45) or $5000 . Both alternatives cost $4000 . It follows that the alternatives are equally profitable when the stock price is $50 . For stock prices above $50 the option alternative is more profitable.
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