The current price of DISH Network stock is $31.50 per share, and six-month European call options on the stock with a strike price of $32.50 are currently trading at $3.60. An investor, who has $10,000 of capital to invest, believes that the price of the stock will increase by 20% over the next six months. The investor is trying to decide between two strategies - (A) buying shares or (B) buying call options. What return will each strategy produce after six months, if the investor is correct in their assessment of the stock? Assume that either a whole number of shares can be bought OR a whole number of option contracts cane be bought (representing the right to buy 100 shares per option contract).     

 Now consider the outcome to the two strategies if the stock price were to decrease by 20%.      
Anticipated change in stock price = -20%   
     
What is the price of a share of the stock in this scenario?      

 

What is the value of all of the shares purchased if the anticipated change in stock price is realized?

 

What is the intrinsic value of the options purchased, assuming they are all exercised at maturity if the anticipated change in stock price is realized?      

     
What is the total loss made in dollar terms?      

What is the total profit made (in percentage terms)? 

Answer rating: 100% (QA)

First lets calculate the return for each strategy if the investors assessment of the stock is correc... View the full answer