Suppose you have $55,000 to invest. You’re considering Miller-Moore Equine Enter

Question

Suppose you have $55,000 to invest. You’re considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $110 per share. You also notice that a call option with a $110 strike price and six months to maturity is available. The premium is $5.5. MMEE pays no dividends. What is your annualized return from these two investments if, in six months, MMEE is selling for $118 per share? What about $106 per share?

Annualized Return Stock        Option         $118 per share % %   $106 per share % %  

Explanation / Answer

Calculation of Annualized Return:

Case:

Stock       

Option      

  $118 per share

14.55%

90.91%

Calculation:

((118-110)/110)*12/6

((118-110 - 5.5) / 5.5)*12/6

(Call option shall be exercised because the market price is more than strike price) Formula :

((Market price - Strike price - Option premium )/ Option Premium )* 12/6

  $106 per share

-7.27%

0.00%

((106-110)/110)*12/6

(Call option shall not be exercised because the market price is less than strike price. Hence the return shall be zero

Calculation of Annualized Return:

Case:

Stock       

Option      

  $118 per share

14.55%

90.91%

Calculation:

((118-110)/110)*12/6

((118-110 - 5.5) / 5.5)*12/6

(Call option shall be exercised because the market price is more than strike price) Formula :

((Market price - Strike price - Option premium )/ Option Premium )* 12/6

  $106 per share

-7.27%

0.00%

((106-110)/110)*12/6

(Call option shall not be exercised because the market price is less than strike price. Hence the return shall be zero

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