(Profit margin from two put options) On 16 May 2015 McDonald’s (MCD)

stock is trading at $98 per share. The price of a put option on MCD expiring 18 September 2015 is $1.80 for options with X = $90 and $3.35 for options with X = $95.

a. You think that shares of MCD will fall in price in the immediate future, and you want to speculate on the stock. Compare (graphically) the following two alternatives: purchasing 1,000 MCD options with an exercise price of $90 versus purchasing 1,000 MCD put options with a strike of $95.

b. Compare the two strategies. Which is preferable?
Use the following template:

Transcribed Image Text:

2345678 5 Investment 6 A: 1,000 options, X = $95 7 B: 1,000 options, X = $90 Stock price in A B C 1 Exercise price 95 Call price 3.35 90 1.8 3,350 B2*1000 1,800 B3*1000 Percentage profit Percentage profit 9 3 months, ST on strategy A on strategy B 10 0 13 11 12 23 30 40 50 14 60 15 70 16 80 17 84 18 19 88 85 90 20 95 21 100 222 110 23 120 24 130