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 $200, and a call option expiring in one year has an exercise price, X, of $200 and is selling at a price, C, of $10. With $20,000 to invest, you are considering three alternatives.

a. Invest all $20,000 in the stock, buying 100 shares.

b. Invest all $20,000 in 2,000 options (20 contracts).

c. Buy 100 options (one contract) for $1,000, and invest the remaining $19,000 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.) The total value of your portfolio in six months for each of the following stock prices is:

	Price of Stock 6 Months from Now
Stock Price	$180	$200	$210	$220
All stocks (100 shares)
All options (2,000 options)
Bills + 100 options

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	$180		$200		$210		$220
All stocks (100 shares)		%		%		%		%
All options (2,000 options)
Bills + 100 options

Answer 1

Price	180	200	210	220
All Stocks	18000	20000	21000	22000
All Options	0	0	20000	40000
Bills + Options	19760	19760	20760	21760

Value of all stocks = Price x No. of shares

Value of all options = No. of options x (Price - 200) if Price > 200

Value of Bills + Options = 19,000 x (1 + 4%) + No. of options x (Price - 200) if Price > 200

% Returns	180	200	210	220
All Stocks	-10.0%	0.0%	5.0%	10.0%
All Options	-100.0%	-100.0%	0.0%	100.0%
Bills + Options	-1.2%	-1.2%	3.8%	8.8%

% Returns = Value / 20,000 - 1