You have $10,000 to invest. The current share price of a particular stock is $100. The corresponding call option expiring in one year with an exercise price of $101 is selling at a premium of $4.90. The put option with the same exercise price is also selling at $4.90. Let us think of two alternative values of the stock price one year from now: $90 and 110. What are your two alternative rates of return by the end of the year from the following portfolios?
a) You invest all your money in 100 shares.
b) You invest all your money in 2,040.40 calls.
c) You buy 95.33 calls and invest the remaining $9,532.80 in a money market fund paying 1% interest annually.
d) You split your money between calls and puts (1020.20 calls and 1020.20 puts).
e) You buy 95.33 shares and the same number of puts.