Question
You believe that ABC stock will continue to trade flat or in a very slight uptrend. You decide to generate some income while minimizing your
You believe that ABC stock will continue to trade flat or in a very slight uptrend. You decide to generate some income while minimizing your risk using an options strategy. To do so, you sell 5 contracts of ABC Put with the exercise price of $25 and 6 months to expiration and buy 5 contracts of ABC Put with the exercise price $22.50 and the same expiration date. Currently, ABC is traded at $28 per share. The standard deviation of the stock returns is 50% per year. The risk-free interest rate is 3%. Ignoring transaction costs, what is the cost of this strategy? What are your maximum gain and maximum loss with this strategy? Graph the profit diagram for this strategy, assuming that the stock stays between $20 and $30 per share
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started