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Profit on Option You have purchased a call option contract on Johnson & Johnson common stock. The option has an exercise price of $57.50 and J & J’s stock currently trades at $58.93. The option premium is quoted at $2.17.

a. Calculate your net profit on the option contract if J & J’s stock price rises to $62.50 and you exercise the option. Net Profit = Final Stock value - Purchase Cost – Exercise cost

b. Calculate your net profit on the option contract if J & J’s stock price falls to $58.00 and you exercise the option. Net Profit = Final Stock value - Purchase Cost – Exercise cost

c-1. If the stock price is $58.00, what would be the gain or loss if you exercise or not exercise the option. Exercise: Net Profit (loss) = Final Stock value - Purchase Cost – Exercise cost

Not Exercise: Net loss = Purchase Cost

c-2. Based on your answers above would it be more profitable to exercise the option or not exercise the option?

Compare the two answers in part c-1.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92869690

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