1. You are bullish on a particular security and have $500 to invest. The stock i

Question

1. You are bullish on a particular security and have $500 to invest. The stock is trading for $100. Call options with a strike price of $100 are trading for $1.00. You decide to invest your entire $500 by purchasing the equities. After 1 month the stock price goes up to $115 and you liquidate liquidate your position? What was your profit?

2. You are bullish on a particular security and have $500 to invest. The stock is trading for $100. Call options with a strike price of $100 are trading for $1.00. You decide to invest your entire $500 by purchasing the equities. After 1 month the stock price goes up to $115 and you liquidate liquidate your position? What is your Holding Period Return?

3. You decide to invest your entire $500 by purchasing the equities. After 1 month the stock price goes down to $85 and you liquidate liquidate your position? What is your profit?

Explanation / Answer

1)No of Securities taht can be purchased = 500/100 = 5 securities

Profit after one month = (115-100)*5

= $75

...

2)Holding Period Return = Profit/Initial Investment * 100

= 75/500 * 100

= 15%

..

..

3)Profit after one month if stock price goes down to $85 = (85-100)*5

= -$75 ..(i.e loss of $75)

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