Question

Just ONE CALL ,Calculate the holding period returns for a long stock position and a long call position if the stock price is $30, $40 and $50 on the expiration date. Assuming the stock was purchased at $40 and the call was purchased at $5.24 with exercise price of $40.

Answer 1

X = $40

S0 = $40

C = $5.24

If St = 30

The loss from the long stock position = 40 - 30 = $10

Holding period return (HPR) from long stock = -10/40 = -25%

Since St < X, the call option expires worthless. So, the loss from long call option = 5.24.

HPR from long call = -100%

If St = 40

HPR from long stock = 0% because the stock stayed at the purchase price

The call option expires worthless because St = X.

HPR from long call = -100%

If St = 50

HPR from long stock = (50 - 40)/40 = 10/40 = 25%

The profit from call option = 50 - 40 - 5.24 = 4.76

HPR from call option = 4.76/5.24 = 0.9083969466

HPR from call option = 90.83969466%