Exhibit 13-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Rick Thompson is considering the following alternatives for investing in Davis Industries, which is now selling for $44 per share: 1) Buy 500 shares, and
2) Buy six month call options with an exercise price of 45 for $ \$ 3.25 $ premium.
-Refer to Exhibit 13-4. 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% gain
B) 53.85% gain
C) 161.54% loss
D) 11.11% gain
E) 53.85% loss

Question

Quizplus · Accepted Answer

The gain from the call option can be calculated as follows: If the stock price reaches $50, the gain per option is the difference between the stock price and the exercise price minus the premium paid, which is $(50 - 45) - 3.25 = $1.75. To annualize this gain, we calculate $\frac{1.75}{3.25} \times \frac{12}{4} = 0.5385 \times 3 = 1.6154$ or 161.54%.

Exhibit 13-4 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $3.25 \$ 3.25 $3.25

Exhibit 13-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\$ 3.25$