Question
Special Agent Dale Cooper is evaluating option strategies that will allow him to profit from large moves in a stocks price, either up or down.
Special Agent Dale Cooper is evaluating option strategies that will allow him to profit from large moves in a stocks price, either up or down. He believes that a combination of 2 long put options and 1 long call option with the same expiration and exercise price would be his objective. TWPK stock is currently trading at $30 per share. A six month call option on TWPK stock with an exercise price of $30 is currently trading at $6. The semi-annual (six-month) risk free rate of interest is 2%. a. What is the price of one six month put option on TWPK stock with an exercise price of $30? b. In the space below, draw the payoff and the profit to this strategy on the same graph. Label the payoff line, the profit line, the axes, the exercise price (with a dollar amount), and the point where the payoff intersects the vertical axis (with a dollar amount). c. Calculate the dollar amounts of the following in the space below and label on the above graph: i. Maximum loss ii. Breakeven stock price(s) of the position
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