(Profit margin from two call options) On 14 May 2015 Microsoft (MSFT)

stock is trading at $48.72 per share. The price of a call option on MSFT expiring 15 Jan 2015 is $2.92 for options with X = $49 and $1.60 for options with X = $52.5.

a. You think that shares of MSFT will rise in price in the future, and you want to speculate in the stock. Compare (graphically) the following two alternatives: purchasing 1,000 MSFT options with an exercise price of $24 versus purchasing 1,000 MSFT options with a strike of $27.

b. Compare the two strategies. Which is preferable?

Use the following template in your answer:

Transcribed Image Text:

1 2 3 4 A Exercise price 49 52.5 5 Investment 6 A: 1,000 options, X = $24 7 B: 1,000 options, X = $27 8 Stock price on the B Call price 2.92 1.6 2,920 1,600 Percentage profit C 9 expiring date, ST on strategy A Percentage profit on strategy B 10 0.0 11 10.0 12 20.0 13 22.0 14 24.0 15 49.0 16 52.5 17 55.0 18 60.0 19 65.0 24 22222 20 70.0 21 75.0 23 80.0 85.0 90.0