Suppose you think Apple stock is going to appreciate substantially in value in the next year. Say the stock’s current price, S0, is $50, and a call option expiring in one year has an exercise(strike) price of $50 and selling at a price of $4. A put option expiring in one year has an exercise(strike) price of $50 sells at a price of $5. With $10,000 to invest, you are considering the following alternatives.
A) Invest all $10,000 in the stock.
B) Invest all $10,000 in the call options.
C) Buy 1000 call options, and invest the remaining dollars in stock shares
D) Buy 1000 call options, and invest the remaining dollars in the put options
What is your rate of return for each alternative for the following four stock prices in one year? Summarize your results in a table.
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Price of stock one year from now |
$30 |
$45 |
$58 |
$87 |
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a |
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b |
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c |
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d |
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