Question

ATC Corp stock is currently priced at $23.60 a share, it is set to announce it’s quarterly earnings at the close of the market today. Ronal thinks that the stock has a potential to double after the market closes if it beats expectations by a large margin, but there’s also a slight chance that the firm does not meet EPS expectations and the stock drops by 30%. As such Ronal is looking into options on ATC stock. The August $25 call option is priced at $0.32 and the August $25 put option is priced at $2.90. Ronal does not want to hold more than 500 shares of ATC and her portfolio.

A. What advice will you give Ronal?

B. What is the upfront cost of your recommended course of action?

C. What will be Ronal's net profit or loss if ATC’s stock rises to $40 at the open next day?

D. What will be Ronal's net profit or loss if ATC‘s stock falls to $19 at the open next day?

Please show your steps so I know how to do this on my own! Thank you so much! :)

Answer 1