Question 8(12 marks)

The common stock of IBM has been trading in a narrow price range for the past month, and you

are convinced it is going to break far out of that range in the next three months. You do not know

whether it will go up or down, however. The current price of the stock is $100 per share, the

price of a three-month call option with an exercise price of $100 is $10, and a put with the same

expiration date and exercise price costs $7.

Required

a) Explain briefly whether the call and the put options are currently in-the-money, at-the-

money, or out-of-the-money

(2 marks)

b) What would be the options strategy that can profit from your conviction about the stock

price' s future movements? What would the total cost of the strategy be?

(5 marks)

c)Calculate the final profit of your strategy if the stock price is $120 per share in 3 months

For what range of stock prices would the strategy lead to a loss?

(5 marks)