The current price of a stock is $94 and 3 month call options with a strike price of $95 currently sell for $4.70 (for one option). An investor who feels that the price of the stock will increase is trying to decide between two strategies: a) Buying 100 shares of stock, b) buying 2000 call options (20 option contracts).
1. What is the investment for each strategy?
2. Which strategy would you choose? Why?
3. How high does the stock price have to rise for the option strategy to be more profitable?(plot diagram for payoff)