Question
The stock of LoRisk Corp. is currently trading at $24. You believe that the stock will continue to trade close to this price over the
The stock of LoRisk Corp. is currently trading at $24. You believe that the stock will continue to trade close to this price over the next few months. You discuss this with your friend, and he suggests that one way for you to profit if your expectations are right is to do the following. -Write 1 call on the above stock with a strike price of $20 and expiration of three months, -Buy 2 calls on the above stock with a strike price of $25 and expiration of three months, and -Write 1 call on the above stock with a strike price of $30 and expiration of three months. The prices of the above calls on one stock are $8, $4.25, and $2.50, respectively. A. In Excel, show what the profit at expiration from the above strategy would be, by varying the stock price at the expiration of options from $15 to $35, in increments of $1. B. Plot the profit diagram in Excel. C. At what stock price(s) at expiration is your profit zero (the break-even points)? D. Does your friends strategy make sense?
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