5.You would like to speculate on a rise in the price of a certain stock. The current stock price is $30 and a 3-month call with a strike price of $32 costs $3. You have $6000 to invest. Identify two alternative investment strategies, one in the stock and the other in an option on the stock (Tell me exactly what you would do in each strategy and calculate the total profit for different stock prices. How many shares/options you would buy/sell?) Strategy 2 (option): Stock price (ST) in the $20 $25 $30 $32 $35 $40 $45 market Option value (Pay off) Premium Profit from strategy 2 a) Would you buy or sell call options? b) How many call options would you buy or sell? c) How will you make money?

5.You would like to speculate on a rise in the price of a certain stock. The current stock price is $30 and a 3-month call with a strike price of $32 costs $3. You have $6000 to invest. Identify two alternative investment strategies, one in the stock and the other in an option on the stock (Tell me exactly what you would do in each strategy and calculate the total profit for different stock prices. How many shares/options you would buy/sell?) Strategy 2 (option): Stock price (ST) in the $20 $25 $30 $32 $35 $40 $45 market Option value (Pay off) Premium Profit from strategy 2 a) Would you buy or sell call options? b) How many call options would you buy or sell? c) How will you make money?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 2Q: Two investors are evaluating General Electric’s stock for possible purchase. They agree on the...

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5.You would like to speculate on a rise in the price of a certain stock. The current stock price is $30 and a 3-month call with a strike price of $32 costs $3. You have $6000 to invest. Identify two alternative investment strategies, one in the stock and the other in an option on the stock Strategy 1 (stock): $25 $30 $32 $40 Stock price (S) in the market Profit from strategy 1 $35 $45 a) Would you buy or sell stocks? b) How many stocks would you buy or sell? c) How will you make money? Strategy 2 (option): $20 $25 $30 $32 $35 $40 $45 Stock price (S-) in the market Option value (Pay off) Premium Profit from strategy 2 a) Would you buy or sell call options? b) How many call options would you buy or sell? c) How will youmake money?
An investor decides to implement a STRADDLE using put options using the following data . The price of stock today is $ 59 , time frame is 6months , the staddle is constructed using a put and a call option with a strike price of $ 61 . The call cost $ 4 and put costs $ 3 . a ) What is the profit ( % ) if in 6 months , if the stock price is at $ 70 b ) What is the profit ( % ) if in 6 months , if the stock price is at $ 60 c ) At what stock price in the future , the investor will make the least / min profit ? d ) Why do investors implement / use this strategy ? For what reason ?
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Suppose you construct a strategy based on options on a stock that is currently selling for $100. The strategy is as follows: Buy one call option having an exercise price of $95. Sell two calls having an exercise price of $100. Buy one call option having an exercise price of $105. All of the options are written on the same stock and all have the same expiration date. Compute the payoff (the dollars you receive) from this strategy at the expiration date for each of the following alternative stocks prices: $90, $95, $98, $100, $102, $105, and $110. What additional information would be required to determine whether your strategy had been profitable? What is the name of this strategy?
You are considering buying some share in The Wayne Coporation as part of your retirement account. First, you want to calculate the expected return for Wayne Corp's stock to see if it meets your very high standards. You have estimateed the 3 for Wayne Corp to be 2.38, the risk free rate in the market to be 2%, and the expected return on the market to be 20. What is the expected return for Wayne Corp? (Answer in Percentage terms and Round to 2 decimals)
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A stock price is $30. An investor buys one call option contract on the stock with a strike price of $28 and sells a call option contract on the stock with a strike price of $27. The market prices of the options are $2 and $1.7, respectively. The options have the same maturity date. Describe the investor’s position and the possible gain/loss he will get (taking into account the initial investment). Make a graph of your gain/loss.
An investor buys a stock if price rises 5% from the 250-day low and shorts a stock if price falls 5% from the 250-day high. What is this strategy called? Will it work if the market is efficient? Explain why
Suppose that you plan to invest in stock A, because you believe that stock A will appreciate in the next 6 months. The stock current price is $100, and a call option on stock A expiring in 6 months has an exercise price of $100 selling at $15 per option. And you have $7500 in hand to invest the following three strategies: A: Invest entirely in stock A. B: Invest entirely in call option on stock A. C: Buy call options the amount of calls is same as the number of shares we purchase in strategy A, and invest the remaining money in T-bills at interest rate whose annual interest rate is 10%. Suppose that the possible stock price are $90, $100, $110, and $120. (a) At expiration (after 6 months), compute the rates of return for each strategy given different possible stock prices. We don't consider the premium we’ve paid for holding call options in this case. (b) Given different stock price at expiration, which strategy would you like to choose? For example, if the stock price is $90, which…
A stock's current price is $20 and a 3-month call with a strike price of $22 sells for $2. You have $4,000 to invest and are comparing two alternate strategies: 1) Buy 200 shares of the stock; 2) Buy 2,000 call options on the stock. Which of the following is correct? The two strategies are equally profitable when the stock price is $26.00 O b. The two strategies are equally profitable when the stock price is $22.00 О с. The option strategy is more profitable when the stock price is $26.00 LO
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The current price of XYZ stock is $50, and two-month European call options with a strike price of $51 currently sell for $10. As a financial analyst at Merrill Lynch, you are considering two trading strategies regarding stocks and options. Strategy A involves buying 100 shares and Strategy B includes buying 500 call options. Both strategies involve an investment of $5,000.a. How much is the profit (loss) for strategy A if the stock closes at $65?(sample answer: $100.25 or -$100.25) b. How much is the profit (loss) for strategy B if the stock closes at $65? (sample answer: $100.25 or -$100.25) c.How high does the stock price have to rise for strategy B to be more profitable (break-even point)? (sample answer: $100.25)