An analyst is considering buying a call option on ZXC stock, which is currently trading at $33.75 per share. Three month call options with a strike price of $30 are trading at a premium of $4.50. Identify which of the following statements is most likely true regarding the ZXC call options.
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A. B. C.C
To determine which statement is most likely true regarding the ZXC call options, let's analyze the given information:
Statement A: The ZXC call options are currently out of the money. To determine if the call options are out of the money, we compare the strike price to the current stock price. In this case, the strike price is $30, and the stock price is $33.75. Since the stock price is higher than the strike price, the call options are indeed in the money, not out of the money. Therefore, Statement A is incorrect.
Statement B: The breakeven underlying price for ZXC stock is $38.25 per share. The breakeven underlying price refers to the stock price at which the buyer of the call option would neither make a profit nor incur a loss. To calculate the breakeven underlying price, we add the strike price to the premium paid for the call options. In this case, the strike price is $30, and the premium is $4.50. Adding them together gives us $34.50. Therefore, the breakeven underlying price is $34.50 per share, not $38.25. Hence, Statement B is incorrect.
Statement C: The potential upside of the ZXC call options is unlimited. The potential upside of a call option refers to the potential profit that can be earned. Call options provide the right, but not the obligation, to buy the underlying stock at the strike price. Since the stock price can increase significantly, the potential profit for call options is theoretically unlimited. Therefore, Statement C is correct.
In conclusion, the most likely true statement regarding the ZXC call options is: C. The potential upside of the ZXC call options is unlimited.