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?
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