Gilead Sciences, Inc. (GILD) is the owner of Remdesivir. A drug developed for Ebola, that has shown some signs of being effective against COVID-19. Note that, Remdesivir has not been approved by the FDA for any use, and the safety and efficacy of Remdesivir for the treatment of COVID-19 are not yet established. However, the FDA as granted an emergency use authorization. Which helps research centers to proceed with clinical trial of Remdesivir treatment (dosage, administration method, combination with other treatment, etc.)

The next quarter report, in September, will be crucial. We will be at the beginning of fall, when some experts are expecting the second wave to start. (This second wave may or may not come, it doesn't matter. What matters is what the majority of the market is thinking.)

Based on the high potential for a large movement in the stock price in September, you want to enter in a straddle strategy on GILD. The options that makes most sens are the November options (there are no September options available at this time.) You are looking at a strike of $75.00

S(0) = $74.08

T = 147/365

rf = 1.0% (continuous time)

(No dividend yield)

sigma (for the call) = 34.5%

sigma (for the put) = 38.6%

Quote for the call: $6.20

Quote for the put: $7.55

(a) Verify whether the put-call parity is respected. (Show and identify all numbers you are using).

(b) If the put-call parity is not respected, explain what could be the reason?

(c) What are the two break-even points?

(d) Suppose that a global event increases the volatility on the market and everything else stays the same. What is the effect on your straddle value?

(e) Suppose, in September, the quarterly report announces that, so far, the clinical trials are not conclusive. and the price of the stock drops to $55.00. What are the minimum values (price or premiums) for the put and the call?

(f) Suppose, in September, the quarterly report announces that, so far, the clinical trials are not conclusive. and the price of the stock drops to $55.00. The price of the call is $0.05 and the price of the put is $30.00. The best strategy at this point is to sell the put (do not exercise). Assume the call expires worthless. What is your total profit/loss on the straddle?