Question

8. You have $5,000 to invest in shares of XYZ that currently trade at $50. You choose to invest 25% of your funds in long-term call options with a strike of $60 that currently are quoted at $1.50. The options expire in 12 months. The other funds will be placed into a money market account earning 1.0%, compounded monthly. How much in dollars would the stock price have to increase in order for you to breakeven on this strategy?

9. Draw a profit diagram (label everything) for one covered call net position given that the call option premium is $13.5 and an exercise price of $200. Show any breakeven points and label the maximum gain and the maximum loss (I need the exact numbers). The current stock price is $201. What would the profit be on 10,000 options if the ending stock price was $180? What would the profit be on 10,000 options if the ending stock price was $220?

3. If you had perfect information about the future and you knew that the price of a stock would be the same three months from now as it is today how would you profit off this information?   Give and explain 3 different (not similar) ways you could profit off this information.

4. Explain the differences between a collar and a bull spread. Which one is riskier? Which one would be the best if you wanted to always make money if the stock price increases in the future? Why?

all these are different question they are not connect with each other.

Answer 1

8. Amount with which call options are purchased = $5000 * 25% =$1250

No of call options purchased = $1250/$1.50 = 833.33 (let's say 833 options)

Remaining amount = $5000*75% = $3750 which was invested at 1% compounded monthly

So, Maturity amount = $3750*(1+0.01/12)^12 = $3787.67

To break even 833 options should give a payoff = $5000 - $3787.67 = $1212.33

So, payoff required from each option = $1212.33/833 =1.45537

or max(S-60,0) = 1.455

S= $61.46

So, the stock price has to rise to $61.46 to breakeven