Series 7 practice questionmediumOptions — Buying Calls as Leverage
An investor has $6,000 to invest. XYZ stock is at $60, and the XYZ Jan 60 call trades at $6. If XYZ rises to $72, what is the percentage return if the investor bought calls versus buying the stock?
- ACalls: 100%, Stock: 20%✓ Correct answer
- BCalls: 200%, Stock: 20%
- CCalls: 100%, Stock: 12%
- DCalls: 200%, Stock: 12%
Explanation
Why A — Calls: 100%, Stock: 20%
Stock: Buy 100 shares at $60. At $72, gain = $12 x 100 = $1,200 on $6,000 invested = 20%. Calls: Buy 10 contracts at $600 each = $6,000. Each call gains $12 - $6 = $6. Profit = $6 x 1,000 shares = $6,000 on $6,000 invested = 100%. Options provide leverage but also risk total loss of premium.
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