Excel help Excel A three-month call option is the right to buy a stock at $20. C

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A three-month call option is the right to buy a stock at $20. Currently the stock is selling for $22 and the call is selling for five dollars. You are considering buying 100 shares of the stock ($2200) or one call option ($500).

A) the price of the stock rises to $29 within three months what would be the profits or losses on each position? What would be the percentage gains or losses?

B) if the price of the stock declines to $18 within three months, what would be the profits or losses on each position? What would be the percentage gains or losses?

C) if the price of the stock remains stable at $22, what would be the percentage gains or losses at the expiration of the call option?

Explanation / Answer

Strike Price, K =$20

Current Price, S0 =$22

Call Price, C=$5

Contract Size =100 shares

a.) Stock Price in 3 month, S1 =$29

Gain in Position of Bought Shares =$2900 -2200 =$700

Percentage Gain =$700/$2200x100 =31.82%

Gain in Position of Option =$100 x Max{(29-20),0} - 500 = $900 - 500 =$400

Percentage Gain =$400/$500x100 =80.00%

b.) Stock Price in 3 month, S1 =$18

Gain in Position of Bought Shares =$1800 -2200 =$-400

Percentage Gain =$-400/$2200x100 =-18.18% (Negative indicates loss)

Gain in Position of Option =$100 x Max{(18-20),0} - 500 = $00 - 500 =$-500

Percentage Gain =$-500/$500x100 = -100.00% (Negative indicates loss)

c.) Stock Price in 3 month, S1 =$22

Gain in Position of Bought Shares =$2200 -2200 =$00

Percentage Gain =$00/$2200x100 =0.00%

Gain in Position of Option =$100 x Max{(22-20),0} - 500 = $200 - 500 =$-300

Percentage Gain =$-300/$500x100 = -60.00% (Negative indicates loss)

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