Question

You have $1000. You are looking at buying 100 shares of a stock that currently sells...

You have $1000. You are looking at buying 100 shares of a stock that currently sells for $10 per share. You could also buy 2000 one-month call options (price at $0.50 each) that have a strike price of $9.90.

Assume that the price of the stock rises 10% to $11 at the end of the month. Compare your positions at the end of the month if you bought only stock compared to buying only options. Assume that the price of the stock has fallen 10% to $9 at the end of the month. Compare your positions at the end of the month if you bought only stock compared to buying only options.

Homework Answers

Answer #1

Assuming that the price of the stock rises 10% to $11 at the end of the month.

  • Position in stocks = 100*$11 = $1100. Profit in stocks = $1100 - $1000 = $100 (10% profit)
  • Position in options = 2000*($11 - $9.9) = $2200, Profit in options = $2200 - $1000 = $1200 (120% profit)

Assuming that the price of the stock has fallen 10% to $9 at the end of the month.

  • Position in stocks = 100*$9 = $900. Loss in stocks =$1000 -$900 = $100 (10% loss)
  • Position in options = 2000*($0) = $0, Loss in options = $1000 = (100% loss)

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