A particular call is the option to buy stock at $25. It expires in 6 months and currently sells for $4 when the price of the stock is $26.
a) What is the intrinsic value of the call? What is the time premium paid for the call?
b) What will the value of this call be after 6 months if the price of the stock is $20? $25? $30? $40?
c) If the price of the stock rises to $40 at the expiration date of the call, what is the % increase in the value of the call? Does this example illustrate favorable leverage?
d) If an individual buys the stock and sells this call, what is the cash outflow (ie. Net cost) and what will the profit on the position be after 6 months if the price of the stock is $10? $15? $20? $25? $26? $30? $40?
e) If an individual sells call naked, what will the profit or loss be on the position after 6 months if the price of the stock is $20? $26? $40?