Question

Wilma Green works as a stock investment manager in Brandy mutual fund. He has been following the stock price movements of Bakery supply international (BSI) and Hull Petrochemical Company (HPC). Green is convinced that the price of BSI stock is going to dramatically increase from its current price of $53.60 and that the price of HPC stock is going to dramatically decrease from its current price of $9.80. She has decided to buy/sell options to take advantage of the situation and has thus gathered the following data on three month put and call options for the two stocks:

	BSI			HPC
Call	Strike	Put	Call	Strike	Put
8.50	45.00	0.20	2.50	7.50	0.15
4.40	50.00	0.50	0.55	10.00	0.75
1.10	55.00	2.75	0.10	12.50	2.75

Suppose that 3 months later, the price of BSI stock is $54.60 and the price of HPC stock is $8.13. Based on the table above, propose a strategy that would yield Green the greatest profit.

Answer 1

Since the price of BSI stock is going to dramatically increase, therefore we buy call option. On the other hand the price of HPC stock is going to dramatically decrease , hence we buy Put option.

BSI Stock

Spot price at expiry	Strike price	Action	Premium paid	Net Profit
$54.6	$45	Exercise	8.50	1.1 (54.6 - 45 - 8.5)
$54.6	$50	Exercise	4.40	0.2 (54.6 - 50 - 4.4)
$54.6	$55	Not Exercise	1.10	(1.10)

HPC Stock

Spot price at expiry	Strike price	Action	Premium paid	Net Profit
$8.13	$7.50	Not Exercise	0.15	(0.15)
$8.13	$10.00	Exercise	0.75	1.12 (10 - 8.13 -0.75)
$8.13	$12.50	Exercise	2.75	1.62 (12.5 -8.13 - 2.75)

From above analysis , we suggest to purchase call option of BSI stock at strike price of $45 and put option of HPC stock at strike price of $ 12.5 for greatest profit.