Three months ago (in October) you bought one Tesla April Call option. Today(January) you've decided that Tesla's share price has peaked and you want to get outof the long position. What is your profit if you exercise compared to your profit ifyou execute an offset (reversing) trade? (Calculate the round-trip profit net of thecost of buying the option in October. Express your answer as the differencebetween the offset profit and profit from exercise. Assume that the option isAmerican and that there is only one share per option contract.) Enter your answer indollars rounded to the nearest dollar.October (Three months Ago)Tesla Stock Price = $806April Tesla Call option (X=600) premium = $325January (Today)Tesla Stock Price = $1003April Tesla Call option (X=600) premium = $447

Investors can hedge their information or hedge their positions using options trading. Buying an…

Answered: Three months ago (in October) you…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

An investor is considering purchasing Apple’s stock for $150 per share. The investor is optimistic (bullish) that the price will increase to $155 by August 19 (appx one month) and decides to buy (long) a call option for $3.95 per share. What is the breakeven value of this potential investment?
You strongly believe that the price of Breener Inc. stock will rise substantially from its current level of $137, and you are considering buying shares in the company. You currently have $13,700 to invest. As an alternative to purchasing the stock itself, you are also considering buying call options on Breener stock that expire in three months and have an exercise price of $140. These call options cost $10 each. a. Compare and contrast the size of the potential payoff and the risk involved in each of these alternatives. b. Calculate the three-month rate of return on both strategies assuming that at the option expiration date Breener's stock price has (1) increased to $155 or (2) decreased to $135. c. At what stock price level will the person who sells you the Breener call option break even? Can you determine the maximum loss that the call option seller may suffer, assuming that he does not already own Breener stock?
A six-month call is the right to buy stock at $19. Currently, the stock is selling for $22, and the call is selling for $6. You buy 100 shares ($2,200) and sell one call (in other words, you receive $600). Does this position illustrate covered or naked call writing? This position illustrates a call. If, at the expiration date of the call, the price of the stock is $32, what is your profit on the combined position? Round your answer to the nearest dollar. $ per 100 shares If, at the expiration date of the call, the price of the stock is $18, what is your profit on the combined position? Round your answer to the nearest dollar. $ per 100 shares
Suppose an investor sells 100 stocks by short selling for 6 months, the stock price is 30 yuan, and the annual interest rate of 6 months is fixed at 3%. How can I use forward contracts to avoid risks? What is the execution price? Please analyze if the stock price rises to 35 yuan or falls to 25 yuan after 6 months of hedging, what are the losses of this investor?
Newman Manufacturing is considering a cash purchase of the stock of Grips Tool. During the year just completed, Grips earned $4.25 per share and paid cash dividends of $2.55 per share. Grips’ earnings and dividends are expected to grow at 25% per year for the next 4 years, after which they are expected to grow at 10% per year for the next 2 years, and afterward grow at 5% to infinity. What is the maximum price per share that Newman should pay for Grips if it has a required return of 15% on investments with risk characteristics similar to those of Grips?
You think that the stock of Fleetwood Corp is likely to rise within the next six months from its current price ($19.00 bid and $20.00 ask), and you want to maximize the amount of profit from your investment. So, you will use a margin account to borrow on margin in order to buy as many shares as you can. Your initial margin requirement is 45%, and you have $90,000 of your own money to invest in the shares. The minimum (maintenance) margin is 30%, and Fleetwood does not pay dividends. (Ignore interest for this problem.) If you buy Fleetwood on margin with the maximum margin loan, what is the maximum number of shares you can buy? Suppose you bought the maximum number of shares of Fleetwood as in (1). Assume that immediately after your purchase, Fleetwood’s share price drops to $18.00 per share. Calculate your new margin. Will you receive a margin call? How far can the price drop before you will receive a margin call? If the stock price falls to $14.00, you calculate that you would…
Suppose you believe that Johnson Company's stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For a total of $320 you can buy a 5-month call option giving you the right to buy 200 shares at a price of $27 per share. If you buy this option for $220 and Johnson's stock price is $29 in 5 months from now right before your option expires, would you exercise your call option and what would your pre-tax net profit or loss be? (Please show work)
Both a call and a put currently are traded on stock XYZ; both have strike prices of $50 and expirations of 6 months. What will be the profit to an investor who buys the call for $4 in the following scenarios for stock prices in 6 months? What will be the profit in each scenario to an investor who buys the put for $6? $40 $45 $50 $55 $60
You would like to be holding a protective put position on the stock of XYZ Company to lock in a guaranteed minimum value of $105 at year-end. XYZ currently sells for $105. Over the next year, the stock price will increase by 9% or decrease by 9%. The T-bill rate is 7%. Unfortunately, no put options are traded on XYZ Company. Required: Suppose the desired put option were traded. How much would it cost to purchase? What would have been the cost of the protective put portfolio? What portfolio position in stock and T-bills will ensure you a payoff equal to the payoff that would be provided by a protective put with X = 105? Show that the payoff to this portfolio and the cost of establishing the portfolio match those of the desired protective put.
You would like to be holding a protective put position on the stock of XYZ Company to lock in a guaranteed minimum value of $210 at year-end. XYZ currently sells for $210. Over the next year, the stock price will either increase by 10% or decrease by 10%. The T-bill rate is 4%. Unfortunately, no put options are traded on XYZ Company. Required: a. How much would it cost to purchase if the desired put option were traded? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What would be the cost of the protective put portfolio?
You are told by your investment advisor that Laduma Co. is expected to earn R5 per share next year, R6 per share the following year and that thereafter earnings are expected to grow by 8% per year. The dividend payout ratio is 60% and the required rare or return on Laduma shares is 15%. If the current share price is R40, would you expect your adviser to make a buy, hold or sell recommendation? If transaction costs are R2,50 per share, would you follow his advice?
TreeOlivia's stock price is $180 and could halve or double in each six-month period. The interest rate is 12% a year. What is the value of a six-month call option on TreeOlivia with an exercise price of $120? What is the option delta for the six-month call with an exercise of $120? The payoffs of the six-month call option can be replicated by buying shares of stock and borrowing. What amount should be invested in stock and what amount must be borrowed? Assume the exercise price is $120. What is the value of the one-year call option on TreeOlivia with an exercise of $150? (Hint: use the two-step binominal tree) What is the value of the one-year put option on TreeOlivia with an exercise of $150?

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