Suppose you think Northeast Airline’s stock is going to appreciate substantially in value in the
next 6 months. Say the stock’s current price S0 is $100 and the call option expiring in 6 months
has an exercise price, X, of $100 and is selling at a price (C) of $10. With $10,000 to invest, you
are considering three alternatives.
(a) Invest all $10,000 in the stock, buying 100 shares.
(b) Invest all $10,000 in 1,000 options (10 contracts).
(c) Buy 100 options (one contract) for $1,000, and invest the remaining $9,000 in a money
market fund paying 4% in interest over 6 months (8% per year).