Suppose you think AppX stock is going to appreciate substantially in value in the next year.

Say the stock’s current price, S0, is $100, and a call option expiring in one year has an exercise price, X, of $100 and is selling at a price, C0, of $10. With $10,000 to invest, you are considering three alternatives.

a. Invest all $10,000 in the stock, buying 100 shares.

b. Invest all $10,000 in 1,000 options (10 contracts).

c. Buy 100 options (one contract) for $1,000, and invest the remaining $9,000 in a money market fund paying 4% annual interest.

What is your rate of return for each alternative for the following four stock prices in one year?
Summarize your results in the table and diagram below. P-639