Question

Stock in Cheezy-Poofs Manufacturing is currently priced at $80 per share. A call option with a $80 strike and 90 days to maturity is quoted at $3.20. Compare the percentage gains and losses from a $25,600 investment in the stock versus the option in 90 days for stock prices of $70, $80, and $90. (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.)

Answer 1

Answer:

Price                Stock     Options

$70                         -3200     -25600

$80                          0             -25600

$90                          3200      54400

Explanation:

Invested in stock

Number of units acquired = $25,600/80 = 320

Now if price goes down to $70 THEN loss will be

320 × (70-80) = - $3,200

percentage of loss will be  3,200/25,600 × 100 = 12.5%

If price stays at $80, then there will neither be a gain nor a loss

320 × (80-80) = 0

If price goes up to $90, then the gain will be

320 × (90-80) = $3,200

percentage of gain will be  3,200/25,600 × 100 = 12.5%

Invested in option

Number of options purchased = $25,600 / 3.20 = 8000

Now If price goes down to $70 then investor will not exercise option in which case loss will be equal to amount of premium paid which is - $25,600.

percentage of loss = 100%

If price stays at $80 even then investor will not exercise call option in which case loss will be equal to the amount of premium paid which is - $25,600

Percentage of loss = 100% loss

If price goes up to $90 then investor will exercise call option

Gain due to exercise of call option = 8000 × (100 - 90) = 80,000

Net gain = 80,000 - 25,600 = $54,400

Percentage gain = 54,400 / 25,600 = 212.5%