Using your online brokerage account, you buy 5 stock options. These are call options, with an exercise price of $45, for shares of Microsoft Corp. The options expire in March of 2018. Microsoft stock currently trades for $46.20 per share. The options are quoted (priced) at 6.00 (each).
a. What is the intrinsic value of each option? What is the time value?
b. What is your total cost for the 5 options?
c. What will be your gain or loss if you hold the options until expiration, and at that time MSFT stock is valued at $44.50?
d. What will be your gain or loss if you hold the options until expiration, and at that time MSFT stock is valued at $46.20 (exactly the same as at purchase)
e. What will be your gain or loss if you hold the options until expiration, and at that time MSFT stock is valued at $54.00?
f. Compute the rate of return for the scenarios in c, d, and e.