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.

Required:
a. What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's 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. 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

Answer:

a) selling a call option to put in order to get a premium income

b) $7 + $4 = $11

c) The net cost of establishing the position = $50

Explanation:

Given data:

stock price = $50

Exercise price = $50

price of put option = $4

price of call option = $7

A) A simple option strategy  would be

selling a call option to put in order to get a premium income  

b) The most money that can be made =  $7 + $4 = $11

C) create a position that involves a put, a call and riskless lending

The net cost of establishing the position = $50