You are an investor who bought a stock of the XYZ company on 2nd January 2008....

You are an investor who bought a stock of the XYZ company on 2^nd January 2008. You are concerned of the significant downside risk if the stock market tumbles and want to use options to hedge your exposure.

Date	Strike Price	Bid Price - Call	Ask Price - Call	Bid Price - Put	Ask Price Put	Stock Price
2-Jan-08	90	9.2	9.5	10.7	11	86.62

If XYZ stock price falls to $42.67 in year, what is the profit/loss of the straddle:

Expert Solution

Solution: In the given question, the stock of XYZ company is under the riske of falling in the near future. Considering the riske, it would be best to buy PUT OPTION so that i can the investor can fix his/her selling price. If in the future stock price falls below the strike price, the investor should excercise the option otherwise not.

Information given in the question:

Strike Price: $90

Put Option details: Bid Price: $10.7

Ask Price:11

Stock Price: $86.62

Profit/Loss:

Sale of Stock: $90

Less: Option Premium: $10.7

Buying Cost of Stock: $86.62

Net Loss : $7.32

jeff jeffy answered 2 years ago

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