USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Rick Thompson is considering the following alternatives for investing in Davis Industries, which is now selling for $44 per share:

-Refer to Exhibit 14.2. Assuming no commissions or taxes, what is the annualized percentage gain if the stock reaches $50 in four months and a call was purchased?
A) 161.54 percent gain
B) 53.85 percent gain
C) 161.54 percent loss
D) 11.11 percent gain
E) 53.85 percent loss

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Rick Thompson is considering the following alternatives for investing in Davis Industries, which is now selling for $44 per share:
 
-Refer to Exhibit 14.2. Assuming no commissions or taxes, what is the annualized percentage gain if the stock reaches $50 in four months and a call was purchased?
A) 161.54 percent gain 
B) 53.85 percent gain 
C) 161.54 percent loss 
D) 11.11 percent gain 
E) 53.85 percent loss

Quizplus · Accepted Answer

The annualized percentage gain can be calculated by first determining the percentage gain and then annualizing it. If the stock reaches $50 in four months and a call was purchased, the gain on the call option (not considering the specific premiums or strike prices as they are not provided) would be significant if the call was in-the-money. To annualize a four-month gain, you would multiply the gain by (12/4) to project it over a year. Without the specific numbers from Exhibit 14.2, we can't calculate the exact gain, but an annualized gain of 161.54 percent suggests a substantial short-term gain that has been extrapolated over a full year, which aligns with how options can leverage stock movements to produce high annualized returns.