(Profit margin from underlying asset and a call option) Youve decided to add 100 shares of ABC...

Question:

(Profit margin from underlying asset and a call option) You’ve decided to add 100 shares of ABC Corp. to your portfolio. ABC stock is currently trading at

$50 a share. As an alternative to buying the shares now, you’re considering buying 1,000 call options on ABC. Each option has an exercise price of $50 and expires in 3 months. The options cost $5 each.

a. Compare the two strategies by filling in the table below and graphing the percentage profits of each strategy against the stock price ST in 3 months.

b. Which strategy is riskier?

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