Question
Abby anticipates a price decline in the price of Microsoft in the next three months. She has just shorted 100 shares of Microsoft common stock
Abby anticipates a price decline in the price of Microsoft in the next three months. She has just shorted 100 shares of Microsoft common stock at $40 per share. To protect against losses, Abby considers the following two investment strategies to combine with her short position in Microsoft common stocks.
Strategy A is to write a MSFT May 35 put with a premium equal to $3 while short-selling the above stock.
Strategy B is to buy a MSFT May 35 call with a premium equal to $8 while short-selling the above stock.
(1) Evaluate each of the above two strategies under the three scenarios (1) future stock price is $20 (2) future stock price is $35 (3) future stock price is $50. Please calculate the profits and losses from the above strategies using the worksheet. Please draw the payoff chart (profit and loss diagram), indicating the exercise price, the breakeven price, and the amount of maximum profit or loss on the chart.
(2) Abby doesnt want to expose herself to the risk of substantial loss, though she embraces the chance of getting a huge profit. From the above two strategies, what would you recommend?
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