Answer Happy

3. Option Investment (20 Marks) Suppose you think WinOdette's stock is going to appreciate substantially in value in the next year. Say the stock's current price, S, 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, Cu, of $30. Option Two has an exercise price of $200, and is selling at a price, Cz, 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: b) 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) (2 Marks) ii) What is your rate of return for each alternative for the following four stock prices 1 year from now? (16 marks). Summarize your results in the table below. You should also show your calculation process below the table to get the full marks. I 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) bin) Given your calculation, tell what is the advantage and disadvantage of a bullish call vertical spread compared with buying a call only? (2 marks)