Profit and Optimum Premium Calculations
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You have taken a long position in a call option on IBM common stock. The option has an exercise price of $136 and IBM's stock currently trades at $140. The option premium is $5 per contract.
a. What is your net profit on the option if IBM's stock price increases to $150 at expiration of the option and you exercise the option?
b. How much of the option premium is due to intrinsic value versus time value?
c. What is your net profit if IBM's stock price decreases to $130?
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Solution Summary
This solution contains step-by-step calculations to determine the net profit and option premium of IBM's stock.
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Below is your tutorial:
A long position in a call option means you bought the right to buy IBM common stock at the strike price, $136, at the expiration date of the contract.
Question A
Net profit = $150-$136-$5=$9 per share
The current ...
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