Stock in Cheezy-Poofs Manufacturing is currently priced at $85 per share. A call

Question

Stock in Cheezy-Poofs Manufacturing is currently priced at $85 per share. A call option with a $85 strike and 90 days to maturity is quoted at $4.25. Compare the percentage gains and losses from a $36,125 investment in the stock versus the option in 90 days for stock prices of $75, $85, and $95. (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. Omit the "%" sign in your response.)

Stock in Cheezy-Poofs Manufacturing is currently priced at $85 per share. A call option with a $85 strike and 90 days to maturity is quoted at $4.25. Compare the percentage gains and losses from a $36,125 investment in the stock versus the option in 90 days for stock prices of $75, $85, and $95. (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. Omit the "%" sign in your response.)

Explanation / Answer

Answer: Duration of call option = 3 months

strike price = $85

call price = $4.25

Alternative-1 Stock investment:

Invested money = $36125

Current price = $85

Number of share bought = $36125/$85 = 425

After three months the price is: $75

So loss = $85 - $75 = $10 per share

Total loss = $4250

After three months the price is: $85

So loss = $85 - $85 = $0 per share

Total loss = $0

After three months the price is: $95

So Gain = $95 - $85 = $10 per share

Total Gain = $4250

Alternative-2 Call Option:

Invested money = $36125

call price = $4.25

Number of calls bought = $36125/$4.25 = 8500

After three months the price is: $75

So Notional loss = $85 - $75 = $10 per share

Total loss = $36125   the invested money

After three months the price is: $85

So loss = $85 - $85 = $0 per share

Total loss = $36125

After three months the price is: $95

So Gain = $95 - $85 = $10 per option

Total Gain = ($10 - $4.25) x 8500 = $48875

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