Question

The common stock of the CALL 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 wit 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 your conviction about the stock prices future movement? B. 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. Who 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) Since one beleives it is going to stay in that range one can sell call as well as put with a strike price of $50 and get options value of $4+$7=$11. Since the stock is not likely to go down or go up the options would expire worthless or the payout shall be less, and one can gain profit.

B) Most money can be made when the options expire worthles= $4+$7=$11. sTOCK PRICE CAN MOVE TO $(50-11)=$39 or (450+11)=$61 in either direction when one loses money

C) One can buy call and sell put and lend $50 at risk free rate. This shall have same payoff as buying a stock. Cost of establishing position =-$4+$7=$3 which is a gain and not a cost