Suppose you think Apple stock is going to appreciate substantially in value in t

Question

Suppose you think Apple stock is going to appreciate substantially in value in the next year. Say the stock's current price, So is $120, and a call option expiring in one year has an exercise price, X, of $120 and is selling at a price, C, of $5. With $12,000 to invest, you are considering three alternatives. a. Invest all $12,000 in the stock, buying 100 shares. b. Invest all $12,000 in 2,400 options (24 contracts). C. Buy 100 options (one contract) for $500, and invest the remaining $11,500 in a money market fund paying 5% in interest over 6 months (10% per year). What is your rate of return for each alternative for the following four stock prices in one year? (Leave no cells blank be certain to enter "O" wherever required. Negative amounts should be indicated by a minus sign. Round the "Percentage return of your portfolio (Bills+ 100 options)" answers to 2 decimal places.) The total value of your portfolio in six months for each of the following stock prices is: Price of Stock One Year from Now 100 $ 10,000 120 S 12,000 130 $ 13,000 140 Stock Price All stocks (100 shares) All options (2,400 options) Bills 100 options 14,000

Explanation / Answer

24000
2400x(130-120)

48000
2400x(140-120)

13075
12075+{100x(130-120)}

14075
12075+{100x(140-120)}

stock Price              100              120 130 140 All Stocks (100)        10,000        12,000 13,000 14,000 All Options (2400) 0 0

24000
2400x(130-120)

48000
2400x(140-120)

Bills + 100 Options        12,075        12,075

13075
12075+{100x(130-120)}

14075
12075+{100x(140-120)}

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