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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?

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Expert Solution

jeff jeffy answered 6 months ago
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