Suppose the current stock price of Bigbucks Corporation is $23, and the call option expiring in 6 months with an exercise price of $23 is selling at $3.5, and the put option with the same terms is selling at $2. Assume there are no brokerage fees or taxes. Further assume that you have $2,300 cash for carrying out the strategy you are going to employ.

You have been analyzing the stock price of Bigbucks corporation for a while. Now, you believe the stock is overvalued and forecast that it may even be forced into bankruptcy despite with a low probability. Your forecast, however, is in sharp contrast to that of a well-known analyst who has just issued a BUY recommendation.

1. Identify an option strategy (by checking one of the boxes in the below table) that is consistent with your investment objective and forecast on the future value of the stock.

Strategy Chosen strategy (check one)

Strategy	Chosen strategy (check one)
Long Call
Short Call
Long Put
Short Put

Explain why the option strategy you have identified is consistent with your investment objective and forecast price of the stock. Also, explain why your option strategy is preferred to an all-stock strategy.

2.(i) Compute the profit/loss of your chosen strategy if the stock price at expiration of option is $10, $20, $23, $30. In addition, compute the breakeven price.

(ii) Using the data from (i) above, draw the profit/loss graph of the option strategy and use $10, $20, $23, $30, and the breakeven price as the future stock prices in the horizontal axis. (Note: For full credit, the graph must be drawn with the given 5 prices on the horizontal axis, labels, and legends that make up the correct graph).