Suppose you think FedEx stock is going to appreciate substantially in value in the next 6 months.
Say the stock's current price, S_0, 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.
Invest all $10,000 in the stock, buying 100 shares. Invest all $10,000 in 1,000 options (10 contracts). 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).
What is your rate of return for each alternative for the following four possible stock prices 6 months from now: S_T = $80, $90, $100, $110, $120?