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Suppose that an investor believes the price of Expedia (EXPE) stock, which currently is trading at...

Suppose that an investor believes the price of Expedia (EXPE) stock, which currently is trading at $50 per share, will increase substantially (to $75) in the near future. Call options on EXPE with a strike price of $50 are selling at a premium of $5. The investor has $5,000 to invest. Which of the following strategies would be most profitable if the investor's expectations turn out to be correct?

A)Buy 100 shares of EXPE stock.

B)Buy 50 shares of EXPE stock and 5 EXPE call option contracts.

C)Buy 10 EXPE call option contracts.

D)Buy 100 shares of EXPE stock and sell 10 EXPE call option contracts.

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Answer #1

Given information

Current trading price of Expedia stock =$50/share

Potential increase = $75/share

Strike price of call option = $50, premium $5.  

Investor has to invest $5,000

He has to (C) buy 10 exe call option contracts to maximise the returns

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