Question

Stock in Cheezy-Poofs Manufacturing is currently priced at $45 per share. A call option with a $48 strike and 90 days to maturity is quoted at $1.50. Compare the percentage gains or losses from a $70,000 investment in the stock versus a $70,000 investment in the options (e.g., $70,000 worth of options) if, in 90 days, the stock price is $40; if the stock price is $50; and if the stock price is $60.

Answer 1

If the stock price is $40 :

% loss in stock investment = ($40 - $45) / $45 = -11.11%

The options will expire worthless as the stock price at expiry ($45) is less than the strike price ($45).

% loss in options investment = 100% (all of the premium that is paid to buy the call options)

If the stock price is $50 :

% gain in stock investment = ($50 - $45) / $45 = 11.11%

The options will expire in-the-money as the stock price at expiry ($50) is more than the strike price ($45).

Profit per call option = (stock price at expiry - strike price - premium paid) = ($50 - $45 - $1.50) = $3.50

% profit per call option = profit per call option / premium per call option = $3.50 / $1.50 = 233.33%

If the stock price is $60 :

% gain in stock investment = ($60 - $45) / $45 = 33.33%

The options will expire in-the-money as the stock price at expiry ($60) is more than the strike price ($45).

Profit per call option = (stock price at expiry - strike price - premium paid) = ($60 - $45 - $1.50) = $13.50

% profit per call option = profit per call option / premium per call option = $13.50 / $1.50 = 900%