Stock in Cheezy-Poofs Manufacturing is currently priced at $65 per share. A call

Question

Stock in Cheezy-Poofs Manufacturing is currently priced at $65 per share. A call option with a $65 strike and 90 days to maturity is quoted at $2.00. Compare the percentage gains and losses from a $13,000 investment in the stock versus the option in 90 days for stock prices of $55, $65, and $75. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Leave no cells blank - be certain to enter "0" and select "None" wherever required. Input all amounts as positive values. Omit the "%" sign in your response.) Options % Gain/Loss Stock % Gain/Loss $55 (Click to select)GainLossNone (Click to select)LossNoneGain $65 (Click to select)LossGainNone (Click to select)LossNoneGain $75 (Click to select)GainLossNone (Click to select)LossNoneGain

Explanation / Answer

Explanation

If the stock is selling for $65, your profit is $0 on the stock, so your percentage return is 0%. Your option is worthless (why?); the percentage loss is –100%.%. I.e. Loss of 13000 so percentage of loss is -13000/13000 =0

If the stock is selling for $55, verify that your percentage loss on the stock is(55-65)/65 = –15.38% and your loss on the option is again –100%. I.e. call option price of -13000/13000

If the stock is selling for $75 in 90 days, your payoff on the stock is $10 per share, or $2,000 total(13000/65 =200 shares *10)

. The percentage gain is $2,000/$13,000= 15.38%.

Your options are worth $10 per share, or $1000 per contract(10*100 option per Contract). However, you have 65 contracts((13000/2))/100, so your options are worth $65000 in all. Since you paid $13,000 for the 65 contracts, your profit is $52000. Your percentage gain is a pleasant $7,000/$13,000 400%.

stock price options % gain or loss stock % gain or loss $55 -100% -13000 -15.38 -2000 $65 -100% -13000 0% 0.00% $75 400% 52000 15.38% 2000

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