Assume a different investor is bullish on BSX and is conside

Assume a different investor is bullish on BSX and is considering the following three potential investments. If at option expiration in January the stock price is $34, what will the return be (% and $ per share) for each choice: a. Just buying the stock at $27.25. b. Just buying the $30 call. c. Buying a bull spread using the $30 and $32 contracts

Solution

.a Buying the stock at $27.25.:

Profit =(34-27.25)=$6.75

Ignoring brokerage ,

Percentage return=(6.75/27.25)*100=24.77%

.b Buying the $30 call:

Payoff at expiration =(34-30)=$4

Intrinsic Value of option =0

Ignoring time value,

Profit=$4

.c Buying a bull spread using the $30 and $32 contracts:

Payoff for buying $ 30 call option=$4

Payoff for selling $ 32 call option =-$(34-32)=-$2

Net payoff =4-2=$2

Ignoring time value of option,

Profit=$2

Dollar return will be maximum for :

a Buying the stock at $27.25.:

Percentage return (Considering net premium paid) will be highest for:

.b Buying the $30 call: