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)decreases to $190.
C)increases to $206.
D)decreases to $196.

Question

Quizplus · Accepted Answer

The holder of the call option will earn a profit if the price of the IBM stock increases above the exercise price plus the premium paid. In this case, the exercise price is $200 and the premium is $5, so the breakeven point is $205 ($200 + $5). Therefore, the holder of the call option will earn a profit if the price of the share increases to $206 or higher. The other options (A, B, and D) are either below or at the breakeven point, therefore, they will not result in a profit for the holder of the call option.

Suppose the Price of a Share of IBM Stock Is