The common stock of the P.U.T.T. Corporation 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 6 months. You do not know whether it will go up or down, however. The current price of the stock is $100 per share, and the price of a 6-month call option at an exercise price of $100 is $5.60.

a. If the risk-free interest rate is 10% per year, what must be the price of a 6-month put option on P.U.T.T. stock at an exercise price of $100? (The stock pays no dividends.)

Put-call parity $ ______

b. What would be a simple options strategy to exploit your conviction about the stock prices future movements? How far would it have to move in either direction for you to make a profit on your initial investment?

Hint: a straddle is established by buying both a call and a put on a stock, each with the same exercise price, X, and the same expiration date, T. Straddles are useful strategies for investors who believe a stock will move a lot in price but are uncertain about the direction of the move.

Total cost of the straddle $ ___________