[question removed by admin]
C is correct because buying a call gives the owner the right to buy the stock at the exercise price. The investor predicts that the stock will increase to $95 at the end of two months. He will likely be able to sell his calls for at least $7 and realize a profit.
I picked B because the put will become worthless from a writer’s perspective if prices increase so the investor can profit from the premium.
Think of it this way… Call is Max (0, Underlying - Strike) while Put is Max (0, Strike-Underlying)
So if you think the price will increase, therefore you need to purchase call; as per relationship above.
Just to add, drawing our the payoffs helps visualize.
Short Put:
_____
/
/
If prices rise, you are left with the premium. If prices fall you are in trouble. With a call, if prices rise you are laughing (and that is your forecast)
Yes… the put will expire and he can profit from the premium, but that’s only $1.76, whereas he expects the stock to appreciate by $7 making a call look very attractive.
The at-the-money call is at $1.56. What does this mean? Well, it says he believes the stock price will increase by $7, which means it has not reached that price point yet. To reiterate, the at-the-money call selling for $1.56 is at a stock price $7 less than the point he thinks it will be at in two months. If he buys the call, he will pay $1.56 for the call, and in two months the stock price will go up $7 and he can profit $5.44 ($7 - $1.56).