Question

1. A three-month call option is the right to buy stock at $20. Currently the stock is sell- ing for $22 and the call is selling for $5. You are considering buying 100 shares of the stock ($2,200) or one call option ($500). a) If the price of the stock rises to $29 within three months, what would be the profits or losses on each position? What would be the percentage gains or losses? b) If the price of the stock declines to $18 within three months, what would be the profits or losses on each position? What would be the percentage gains or losses? If the price of the stock remained stable at $22, what would be the percentage gains or losses at the expiration of the call option? d) If you compare purchasing the stock to purchasing the call, why do the percentage gains and losses differ?

Please use excel to solve and show steps.

Answer 1

H I B C D E F G IF ANY QUERY, FEEL FREE TO ASK IN COMMENTS Solution Profit CALL buy Profit Share buy (MAX(current price - strike price,o) - premium paid) x 100 (Current Price - Purchase Price) x 100 = a,b,c Profit at various position 7 8 9 10 11 Investment in: - Call Option Share Purchase 500 2200 12 13 14 15 16 Stock Purchas Strike Premi Profit Price e Price Price um CALL buy Share buy 29 2 2 20 2 700 700 18 22 20 2 -200 -400 22 | 22 | 2012 | 0 0 Formula CALL buy =(MAX(B16-D16,0)-E16)*100 =(MAX(B17-D17,0)-E17)*100 =(MAX(B18-D18,0)-E18)*100 Share buy =(B16-C16)*100 =(B17-C17)*100 =(B18-C18)*100 17 18 19 20 21 22 23 24 Stock Price 29 18 22 Percentage gain/loss Formula CALL buy Share buy CALL buy 140.00% 31.82% 1=F16/$E$11 | -40.00% -18.18% 1=F17/$E$11 0.00% 0.00% =F18/$E$11 Share buy =G16/$E$12 =G17/$E$12 =G18/$E$12 25 26 d Percentage of gain and loss differ due to change in the profit at different option and different investment.