Question

Suppose you think Apple stock is going to appreciate substantially in value in the next year. Say the stock’s current price, S₀, is $75, and a call option expiring in one year has an exercise price, X, of $75 and is selling at a price, C, of $10. With $15,000 to invest, you are considering three alternatives.

a. Invest all $15,000 in the stock, buying 200 shares.

b. Invest all $15,000 in 1,500 options (15 contracts).

c. Buy 100 options (one contract) for $1,000, and invest the remaining $14,000 in a money market fund paying 4% in interest over 6 months (8% per year).

What is your rate of return for each alternative for the following four stock prices in 6 months? (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Round the "Percentage return of your portfolio (Bills + 100 options)" answers to 2 decimal places.)
    

A.The total value of your portfolio in six months for each of the following stock prices is:

price stock 6 months from now

stock price $55, $75, $85, $95

all stocks (200 shares)

all options (1,500 options)

bills + 100 options

B. The percentage return of your portfolio in six months for each of the following stock prices is:

Price of stock 6 months from Now

stock price $55, $75, $85, $95

all stocks (200 shares

all options (1,500 options)

bills + 100 options

Answer 1

A) Price of stock Six month from now

$55, $75, $85, $95

All stocks (200 shares)

$11,000 $15,000 $17,000 $19,000

(200 X 55) (200 X 75) (200 X 85) (200 X 95)

All options (1,500 shares)

$0 $0 $15,000 $30,000

Bills + 100 options

$14,560 $14,560 $15,560 $16,560

(14000 X 104%) (1000 + 14000 X 104%)

B) Percentage of Stock Six month from Now

$55, $75, $85, $95

All stocks (200 shares)

-20% 0% 10% 20%

(12000 -3000 /15000)

All options (1,500 shares)

-100% -100% 0% 100%

Bills + 100 options

-6.4% -6.4% 3.6% 13.6%