Pitchgent, Inc., stock is currently trading at $22 per share. There are two types of options available on the stock. Call options with a strike price of $16, which expire next month, are currently trading at $7.00. Put options with a strike price of $16 which expire next month are currently trading at $1.10. Larry invests $132 in common stock. Keaty invests $132 in the call options. Marek invests $132 in the put options. At the end of one month, the price of Pitchgent, Inc., is $25. Who made the most money from their investment?

Question

Quizplus · Accepted Answer

Keaty's investment in call options yields the highest return. With the stock price rising to $25, the call options (with a strike price of $16) are now worth $9 each ($25 - $16). Keaty could buy 18.857 (132 / 7) options, which would now be worth 169.713 (18.857 * 9) units, significantly more than the initial investment and more than the returns on the common stock or put options.