Question

The common stock of the C.A.L.L. Corporation has been trading in a narrow 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 is $4, and a call with the same expiration date and exercise price sells for $7.

1. What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement?

2. What is the most money you can make on this position? How far can the stock price move in either direction before you lose money?

c) 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. What is the net cost of establishing that position now?

Answer 1

a.It can be exploited through using a short straddle in which both the call option and put option of the same strike price need to be sold in the market in order to gain from the premium amount because there is no movement expected as volatility is expected to be lower.

b. The most money you can make on this position would be the premium of both the options which is total of (7+4)=$ 11 and you will start to lose money if the share will start to go go to lower than $ 46 and it is also starting to go higher than$ 57.

C. The net cost of establishing the position would be the premium of optionoption because it is the most the share holder can lose on holding onto the options as there is a risk free environment.