Answer to Question #120259 in Management for Kgothatso

Question

T.O.T investment would like you to speculate a rise in the price of a certain stock . The stock price is R 40 and a 3 months call option with a strike of R45 costs R5.8 T.O.T has R7000 to invest . You identified 2 strategies whereby one involves investing in stock of 300 share and the other involves 30 option contacts at par

I. What's the potential gains and /or losses for each strategy if the share price goes up to R50 or drop to R 30?

Answer 1

Investing a stock of 300 shares can grow your money. This is because, with time, the stock market seems to rise in value. However, losses may occur because stock prices fluctuate regularly. Investing 30 option contracts per guards from downside risk on the available stock. However, this strategy can expose the investor to unlimited losses