You paid $3.25 for a call option on AVEX Corp. with a strike price of $60 on March 1. The option expires on April 21. The price of AVEX common stock on March 1 was $61.40. On March 22, the price of AVEX stock had increased to $63.85 and the call options were now selling at $5.40. AVEX Corp. does not pay dividends to its common shareholders.
a. Compute the rate of return on AVEX common stock and the call option over the three-week timeframe.
b. What is the time value component of the call option price on March 22?
c. Assume you are increasingly bullish on AVEX common stock in the long-run, and you now wish to actually own 100 shares of AVEX stock instead of the options which expire in a few weeks. Analyze whether it would be better to exercise the options on March 22 or sell the options at $5.40 and buy 100 shares of AVEX stock at $63.85 per share. Ignore transactions fees.
d. Investors can exercise European-style options only at expiration, while Americanstyle options can be exercised prior to and including the expiration date. Hence, all else equal, American-style options should be worth more than European-style options. Discuss whether this difference in price would be substantial or minimal.