Question
In: Finance
The shares of Great Company currently trades at $21. An option trader considers the following strategy...
The shares of Great Company currently trades at $21. An option trader considers the following strategy concerning the stock. Trader buys one put option that expires next month with the strike of $20 for $1 as premium and simultaneously buys a call option with the strike price of $22 with $2 premium. Please construct a figure that depicts the value of the strategy and the profit at expiration. You may need to look at a relatively wide stock price range at expiration (maybe $13-25 to understand what is going on and to graph the results).
Please discuss also, what are the expectations of the trader about the future price of the stock?
What are the main risks involved?
Solutions
jeff jeffy answered 7 months agoRelated Solutions
A trader has a call option contract to sell 100 shares of a stock for a...
A trader has a call option contract to sell 100 shares of a
stock for a strike price of $50. What is the effect on the terms of
the contract of the following events?
(a) A $5 dividend being paid
(b) A 5-for-4 stock split
(c) A 10% stock dividend being paid.
A trader has a call option contract to sell 100 shares of a stock for a...
A trader has a call option contract to sell 100 shares of a
stock for a strike price of $50. What is the effect on the terms of
the contract of the following events?
(a) A $5 dividend being paid
(b) A 5-for-4 stock split
(c) A 10% stock dividend being paid.
21. Currently, you own 2,360 common shares of a company. The company will provide a dividend...
21. Currently, you own 2,360 common shares of a company. The
company will provide a dividend of $1.74 per share next year, no
dividend in two years from today, and a liquidating dividend of
$37.80 per share in three years from today. The require return on
the common shares is 9.01%. You want a total cash flow of just $680
next year and will use any excess received to buy more shares of
the company. How much total dividends will...
1. an investor considers investing in shares A and B. Stock A is currently trading at...
1. an investor considers investing in shares A and B. Stock A is
currently trading at the price of $1000 with price earning ratio
(PER) value of 10X, meanwhile stock B is currently trading at the
price of $2000 with price earning ratio value of 20X. Its estimated
that EPS stock A will increase 50% than its previous EPS in the
next 3 months, while EPS stock B will decrease by 50% in the next 3
months. According to that...
You are a trader and you are enticed by shares of BB that currently cost $52....
You are a trader and you are enticed by shares of BB that
currently cost $52. There are two choices you can do, either you
buy the BB shares at $52 or do the alternative and purchase
European call options on BB shares. The premium on the option for
BB shares is five dollars the time before the contract expires is 3
months and the exercise price of the contract is fifty dollars. The
volatility is thirty percent per annum,...
Company A considers acquiring company B. Shares of the company A trade at $30 and there...
Company A considers acquiring company B. Shares of the company A
trade at $30 and there are 5,000 of A shares outstanding. Company B
has 200 shares outstanding worth $100 each. If A acquires B, then
the resulting synergy will amount to $10,000.
Suppose A offers to exchange every B’s share for four shares in
the merged company.
1.What will be the share price of the merged company?
2. What will be the total benefit for the existing shareholders
of...
A trader writes seven naked put option contracts, with each contract being on 100 shares. The...
A trader writes seven naked put option contracts, with each
contract being on 100 shares. The option price is $5, the time to
maturity is eight months, and the strike price is $35. 2 a) What is
the margin requirement if the stock price is $41? b) How would the
answer to a) change if the stock price were $30? c) How would the
answer to a) change if the trader is buying instead of selling the
options?
Suppose you construct the following European option trades on Apple stock: write a put option with...
Suppose you construct the following European option trades on
Apple stock: write a put option with exercise price $31 and premium
$1.43, and write a call option with exercise price $31 and premium
$3.97. What is your maximum dollar net profit, per share?
Facebook (FB) currently trades at $194.00. You purchase a 16 month European $8.00 strike call option...
Facebook (FB) currently trades at $194.00. You purchase a 16
month European $8.00 strike call option on a short futures contract
on one share of FB. The futures delivery date is 29 months from now
and the delivery price is $233.00. The risk-free rate is 5.1%.
Compute the range of prices of FB 16 months from now that will make
you want to exercise your option.
Facebook (FB) currently trades at $210.00. You purchase a 23 month European $11.00 strike call option...
Facebook (FB) currently trades at $210.00. You purchase a 23
month European $11.00 strike call option on a short futures
contract on one share of FB. The futures delivery date is 43 months
from now and the delivery price is $246.00. The risk-free rate is
4.2%. Compute the range of prices of FB 23 months from now that
will make you want to exercise your option.
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- A labor market has 50,000 people in the labor force. Each month, a fraction p of...
- A road with a radius of 72 m is banked so that a car can navigate...
- 1) If you had not dried the solid, would the calculated percent yield have been higher,...
- Two structures of alanine can be drawn that have a net charge of zero, but the...
- Co(II) was used as an internal standard to analyze a sample of Ti(IV) with atomic absorption...
- Matlab Programming Write an M-file to read a real-valued vector of any length from the keyboard...
- TASK back to top In the contemporary management environment, mergers and acquisitions are hot topics; particularly...
ADVERTISEMENT