You have $100 to invest.You can invest it in one of two alternatives.The first is to invest it in a stock that is trading for $100.The second is to buy three-month 100-strike calls on the stock that are currently trading at $4 each.You expect the stock price to appreciate with a maximum price after three months of $110.What is the maximum return on investment you can generate using stock and options?

Question

Quizplus · Accepted Answer

You can buy 25 calls for $100.If the stock price reaches $110 then you obtain a payoff of $250 on an investment of $100,i.e. ,a return of 150%.If you invested in the stock your return would be merely 10%.

You Have $100 to Invest