Problem:
Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share.
Required:
Question: If you buy this option for $3.10 and Basso's stock price actually rises to $45, what would your pre-tax net profit be?
Note: Provide specific examples to support your answers.