Question

company is close to perfecting a monoclonal antibody cocktail that may prevent Covid 19 infection and may be an effective treatment for patients with the disease . The company's stock is tradine at $ 600 per share today . You believe there is a high probability that within a month , the cocktail will succeed and the stock price will double . However , if the vaccine fails FDC " Phase Three Trials " the stock price may fall by 40 % or more . You buy four call options today a rach option is associated with one share of stock ) that : • Gives you the right to purchase a share of company in one year , for $ 630 . • Costs $ 40 today .

What is your total gain ( + ) or loss ( - ) on this trade if REG's stock is trading at $ 1,000 per share in a year ? Assume that you want to end up with only cash ( not shares of stock ) . Round your answer to zero decimal places .

How is your answer for gain or loss impacted if the firm's stock is trading at $ 590 today , but nothing else changes ?

O My gain decreases

O My loss gets worse

O My gain / loss is unaffected .

Answer 1

One call option is associated with one share.

The price of the option is $40 and gives the right to purchase at $630.

So on purchasing 4 call options, we have to pay = 4*40 =$160

So by paying $160, we will get 4 shares at $630. So the effective cost of each share becomes $630+$40 = $670

If the price of stock grows to $1000, then we will have a gain as we have bought at a lower price i.e. $670

So total gain will be in this trade = 4*(1000-670) = $1320

But if the price of the stock is $590 today then we won't have any change or impact on our gain as the option doesn't have any relation with the present price. It will still deliver us the stock at $630 after a year.

So the answer for the second part will be option C.