You buy the call option and hold until the expiration date

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Reference no: EM132065441

On 26 February 2017, Kellogg stock closed at $75. For $0.85 you can buy a call option on Kellogg with an exercise price of $85. The option expires on 16 June 2017.

i. What right does this call option give you?

ii. Suppose you buy the call option and hold until the expiration date. If the share price on 16 June is $78, will you exercise the option? What will be your profit?

iii. If the share price on June 16th is $88, will you exercise the option? What will be your profit? Write a diagram showing your payoff.

(c) For the same Kellogg share in part (b), assume a June 16 call option with an exercise price of $80 had an option premium of $1.95. Explain, using a diagram and a payoff table, how a trader could set up a bull call spread with June 16 calls.

Reference no: EM132065441

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