Suppose you have $30,000 to invest. You’re considering Miller-Moore Equine Enter
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Question
Suppose you have $30,000 to invest. You’re considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $50 per share. You also notice that a call option with a $50 strike price and six months to maturity is available. The premium is $4.2. MMEE pays no dividends. What is your annualized return from these two investments if, in six months, MMEE is selling for $56 per share?
Suppose you have $30,000 to invest. You’re considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $50 per share. You also notice that a call option with a $50 strike price and six months to maturity is available. The premium is $4.2. MMEE pays no dividends. What is your annualized return from these two investments if, in six months, MMEE is selling for $56 per share?
Annualized Return Stock Option $56 Per Share % %Explanation / Answer
Stock Investment:-
Amount to invest = $30,000
Current price of shares = $50
Number of shares bought = $30,000 / $50 = 600
Price after 6-months = $56
Value of investment after 6-months = 600*$56 = $33,600
Percentage return on stock investment = (33600-30000)/30000 = 12%
Annualized return = (1.12)^2 - 1 = 25.44%
Option Investment
Premium for each contrct = $4.2
Value of call on expiry when stock price is $56 = $56-$50 = $6
6-month return on call option = 1.8/4.2 = 42.86%
Annualized Return = 1.4286^2 - 1 = 104.09%
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