Suppose you think Wal-Mart's stock is going to appreciate substantially in value in the next year. Say the stock’s curre

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Suppose you think Wal-Mart's stock is going to appreciate
substantially in value in the next year. Say the stock’s current
price, S0, is $200. Two call options on the stock are currently
traded in the market. Both options have one year to expiration.
Option one has an exercise price of $180, and is selling at a
price, C1, of $30. Option Two has an exercise price of $200, and is
selling at a price, C2, of $20. With $60,000 to invest, you are
considering four alternative strategies.
Strategy A: Invest all $60,000 in the stock,
buying 300 shares
Strategy B: Invest all $60,000 in Option one,
buying 2,000 options (20 contracts)
Strategy C: Invest all $60,000 in Option two,
buying 3,000 options (30 contracts)
Strategy D: Invest all $60,000 in bullish call
vertical spreads using the above mentioned two calls: Purchase of
Option one and simultaneously sell Option two.
Calculate & Answer:
i) How many maximum contracts you can invest in the bullish call
spreads as presented in Scenario D? (Hints:
For each one purchase of Option one, you will simultaneously sell
one Option two for the bullish call vertical spreads)
ii) What is your rate of return for
each alternative for the following four stock prices 1 year from
now? Summarize your results in the table below. You should
also show your calculation process below the table to get the full
marks.
Price of Stock one year from Now
$180
$200
$220
$300
Strategy A (Buy Stock Only)
Strategy B (Buy Option one)
Strategy C (Buy Option two)
Strategy D (Bullish Call Vertical Spreads)
iii) Given your calculation, tell what is the advantage and
disadvantage of a bullish call vertical spread compared with buying
a call only?