Information:

An investor believes that the NVDA stock price is going to increase in the following 12 months from the current stock price of $200.

Call options on NVDA stock expiring in 12 months have a strike price of $206 and sell at a premium of $20 each.

The investor has $12,000 to invest, and is considering 3 alternatives:

Purchase 6 call option contracts.
Purchase 60 shares.
Invest $10,800 in a money market fund returning 9% per year and buy 60 call options (not option contracts) with the remaining money.

Assume that the stock price will be $234 per share after 12 months.

Question 1: What will be the investor's rate of return for alternative 1?

Question 2: What will be the investor's rate of return for alternative 2?

Question 3: What will be the investor's rate of return for alternative 3?

*** Must show some of your work for each question to earn credits. A number without any work does not receive credits.

Question

Information:

An investor believes that the NVDA stock price is going to increase in the following 12 months from the current stock price of $200.

Call options on NVDA stock expiring in 12 months have a strike price of $206 and sell at a premium of $20 each.

The investor has $12,000 to invest, and is considering 3 alternatives:

Purchase 6 call option contracts.
Purchase 60 shares.
Invest $10,800 in a money market fund returning 9% per year and buy 60 call options (not option contracts) with the remaining money.

Assume that the stock price will be $234 per share after 12 months.

Question 1: What will be the investor's rate of return for alternative 1?

Question 2: What will be the investor's rate of return for alternative 2?

Question 3: What will be the investor's rate of return for alternative 3?

*** Must show some of your work for each question to earn credits. A number without any work does not receive credits.

BlackTom AI · Accepted Answer

{"reasoning": "To analyze the rate of return for each investment alternative, we must calculate the final value of each investment and compare it to the initial investment. The rate of return is the profit divided by the initial investment.

**Alternative 1: Purchase 6 Call Option Contracts**
- Each call option allows the purchase of NVDA stock at $206. With the stock price at $234, the intrinsic value per option is $28 ($234 - $206).
- The premium paid per option is $20, so the profit per option is $8 ($28 - $20).
- Each contract consists of 100 options, so 6 contracts equal 600 options.
- Total profit from options: 600 options * $8 = $4,800.
- Initial investment: 600 options * $20 = $12,000.
- Rate of return: $4,800 / $12,000 = 0.40 or 40%.

**Alternative 2: Purchase 60 Shares**
- Initial cost of shares: 60 shares * $200 = $12,000.
- Ending value of shares: 60 shares * $234 = $14,040.
- Profit from shares: $14,040 - $12,000 = $2,040.
- Rate of return: $2,040 / $12,000 = 0.17 or 17%.

**Alternative 3: Invest in Money Market Fund and Buy 60 Call Options**
- Money market fund investment: $10,800.
- Money market fund grows to: $10,800 * 1.09 = $11,772.
- Profit from money market fund: $11,772 - $10,800 = $972.
- Remaining money for options: $12,000 - $10,800 = $1,200.
- Cost of 60 call options: 60 * $20 = $1,200.
- Profit per call option: $28 - $20 = $8.
- Profit from 60 call options: 60 * $8 = $480.
- Total profit: $972 (money market) + $480 (options) = $1,452.
- Rate of return: $1,452 / $12,000 = 0.121 or 12.

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