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Stock options for Rick Thompson's investments

See the case study attached.

How do the three proposed option strategies compare? Why might you choose one strategy versus another?


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The three strategies mentioned in the case study are suitable for different scenarios for the future stock price. The "buy call options" strategy will be profitable only if price rises in the future. For example, suppose that Thompson buys a call with strike price $80 and expiration in 60 days (this option is valued at $1.96 according to Exhibit 2). In this case, this strategy will be profitable if stock goes up to more than $81.96 (the current price is $75), and this must happen before 60 days pass. Therefore, this strategy should only be used if Thompson expects the stock to experience this move; otherwise he will experience a loss. The advantage of this strategy over just holding the stock is that his maximum loss is limited to just $1.96 per option, while his maximum gain is (theoretically) unlimited - as the stock ...

Solution Summary

In a 584 word discussion, the three propsed option strategies are discussed and a conclusion is presented.