Mary Buchanan

## Answered question

2022-01-05

The common stock of the C.A.L.L. Corporation has been trading in a n $⇒$ range around 50 per share for months, and you believe it is going to stay in that range for the next three months. The price of a three-month put option with an exercise price of 50 per share form on ths,and you believe it is going to stay in that range for the next three months. The price of a three-month put option with an exercise price of 50 is 4, and a call with the same expiration date and exercise price sells for 4, and a call with the same expiration date and exercise price sells for 7.
a. What would be a simple options strategy using a put and a call to exploit your conviction about the stock price’s future movement?
b. What is the most money you can make on this position?
c. How far can the stock price move in either direction before you lose money?
d. How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration? The stock will pay no dividends in the next three months.
e. What is the net cost of establishing that position now?

### Answer & Explanation

Robert Pina

Beginner2022-01-06Added 42 answers

Step 1
Known variables:
Stock price $\left({S}_{0}\right)=\mathrm{}50$
Exercise price $\left(X\right)=\mathrm{}50$
Price of put option $\left(P\right)=\mathrm{}4$
Call option premium $=\mathrm{}7$
Period
Step 2
a) Best option strategy is a short straddle position by selling both a call and a put a similar stock value.
Premium: Straddle position $\text{Premium cost for call option}+\text{Premium cost for put option}$
Straddle position $=\mathrm{}7+\mathrm{}4$
Straddle position $=\mathrm{}11$
Step 3
b) If the stock approaches $50, in such a situation both options become insignificant and the profit amounts to$11. This is the optimum potential profit, since at any further stock price, a person should settle the pay on either the put or the call.
Step 4
c) The stock may move by $11 in whichever direction until a persons Bubich13 Beginner2022-01-07Added 36 answers Answer: a) selling a call option to put in order to get a premium income b) $\mathrm{}7+\mathrm{}4=\mathrm{}11$ c) The net cost of establishing the position $=\mathrm{}50$ Explanation: Given data: stock price $=\mathrm{}50$ Exercise price $=\mathrm{}50$ price of put option $=\mathrm{}4$ price of call option $=\mathrm{}7$ A) A simple option strategy would be selling a call option to put in order to get a premium income b) The most money that can be made $=\mathrm{}7+\mathrm{}4=\mathrm{}11$ c) create a position that involves a put, a call and riskless lending The net cost of establishing the position $=\mathrm{}50$ karton Expert2022-01-11Added 613 answers Step 1 a) Formula: $C=P+{S}_{0}-\frac{X}{\left(19r{\right)}^{T}}$ C= Call option price P=Put option price ${S}_{0}$=Stock price X=Exercise price r= Risk-free rate T= Time period Step 2 C=$4+$50-$\frac{50}{\left(1+10\mathrm{%}{\right)}^{\frac{3}{12}}}$ =$4+$50-$48.82
=$5.18 Step 3 b) Options are derivatives dependent on the valuation of underlying financial assets such as stocks. A contract for options allows the holder to purchase or sell the underlying asset, depending on the kind of deed they possess. Step 4 Contrary to the future, if they prefer not, the holder must not purchase or sell the land. A call option allows the holder within a defined time span, the holder may buy the asset at a specified price. Put Options enable the holder to trade the resource within such a specified time period at a specified price. Step 5 The technique of simple options is the sale of a straddle. Call for$5.18+$4=$9.18 to produce premium revenue.
Step 6
c)
The net cost of positioning now is \$50.

Do you have a similar question?

Recalculate according to your conditions!

Ask your question.
Get an expert answer.

Let our experts help you. Answer in as fast as 15 minutes.

Didn't find what you were looking for?