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The current price of a stock is $75, and three-month call options with a strike price of $78 currently sell for $3.75. An investor has $7,500 available for use, and is trying to decide whether t buy 100 shares of the stock or to buy share call options (each option carries the right to buy one share).
a) Illustrate that the potential profit and potential loss are both higher with option trading than with stock trading, by showing what happens if the stock price rises to $85, or falls to $67.
b) How high does the stock price have to rise for the option strategy to be more profitable?
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