Q3. The current price of a stock is $54, and three-month call options with a strike price of $55 currently sell for $2.70. Peter feels that the price of the stock will increase over the next three Speculation months and he wants to win big, so instead of buying 1000 shares he buys 200 call option contracts (1 contract = 100 shares). Draw a chart to compare how the spot price 3 months with options later, in the range of $44-$64, will affect Peter's profit/loss when he invests all his money in stocks or all in the options. Suppose Peter will not resell the options. Answer: Let S be the spot price Profit/loss of buying and selling stocks: Profit/loss of buying the options: Profit/loss from the Spot Price stock $44 Profit/loss from the long call option Return % Return % 0% 0% $451 0% 0% $46 0% 0% 0% 0% $47 $48 0% 0% $49 0% 0% 0% $501 0% $51 0% 0% $521 0% 0% 0% 0% $53 $54 0% 0% $55 0% 0% 0% 0% $56 $57 0% 0% $58 0% 0% $59 0% 0% 0% 0% $60 $61 $62) 0% 0% 0% 0% $631 0% 0% 0% $64 0% Q3. The current price of a stock is $54, and three-month call options with a strike price of $55 currently sell for $2.70. Peter feels that the price of the stock will increase over the next three Speculation months and he wants to win big, so instead of buying 1000 shares he buys 200 call option contracts (1 contract = 100 shares). Draw a chart to compare how the spot price 3 months with options later, in the range of $44-$64, will affect Peter's profit/loss when he invests all his money in stocks or all in the options. Suppose Peter will not resell the options. Answer: Let S be the spot price Profit/loss of buying and selling stocks: Profit/loss of buying the options: Profit/loss from the Spot Price stock $44 Profit/loss from the long call option Return % Return % 0% 0% $451 0% 0% $46 0% 0% 0% 0% $47 $48 0% 0% $49 0% 0% 0% $501 0% $51 0% 0% $521 0% 0% 0% 0% $53 $54 0% 0% $55 0% 0% 0% 0% $56 $57 0% 0% $58 0% 0% $59 0% 0% 0% 0% $60 $61 $62) 0% 0% 0% 0% $631 0% 0% 0% $64 0%