You observe a stock is priced at $165. This stock’s option expirations are July 15, August 20 and October 15. The risk-free rates associated with the option expirations are 5 percent, 5.35 percent and 5.7 percent. The standard deviation is 21 percent. The stock’s option prices are stated in the table below.
Calls |
Puts |
|||||
Strike |
Jul |
Aug |
Oct |
Jul |
Aug |
Oct |
160 |
6.00 |
8.10 |
11.10 |
0.75 |
2.75 |
4.50 |
165 |
2.70 |
5.25 |
8.10 |
2.40 |
4.75 |
6.75 |
170 |
0.80 |
3.25 |
6.00 |
5.75 |
7.50 |
9.00 |
Required:
(a) Construct a bear spread using October calls.
(b) Determine the profits for the holding period indicated if the stock price is at $150, $155, $160, $165, $170, $175 and $180 at the end of the holding period. Plot a graph for this result.
(c) Compute the breakeven stock price at the expiration.
(d) Identify the maximum and minimum profit.
(e) Justify your answers above.
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