Question
Momo, a fast-growing company, is going to make an earnings announcement three months from now. But you do not know whether it will be positive
Momo, a fast-growing company, is going to make an earnings announcement three months from now. But you do not know whether it will be positive or negative (i.e., the stock price will go up or down). The current price of the stock is $50 per share. A three-month call with an exercise price of $50 costs $5. A put with the same exercise price and expiration date costs $3.
a. What would be a simple options strategy to bet on the stock price volatility?
b. Construct a table that shows the payoff and profit from the options strategy.
c. For what range of stock prices would the options strategy lead to a loss?
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