Question

You observe a stock is priced at $165. This stock’s option expirations are July 15, August 20 and October 15. The risk-free rates associated with the option expirations are 5 percent, 5.35 percent and 5.7 percent. The standard deviation is 21 percent. The stock’s option prices are stated in the table below.

	Calls			Puts
Strike	Jul	Aug	Oct	Jul	Aug	Oct
160	6.00	8.10	11.10	0.75	2.75	4.50
165	2.70	5.25	8.10	2.40	4.75	6.75
170	0.80	3.25	6.00	5.75	7.50	9.00

Required:

(a) Construct a bear spread using October calls.  

(b) Determine the profits for the holding period indicated if the stock price is at $150, $155, $160, $165, $170, $175 and $180 at the end of the holding period. Plot a graph for this result.

(c) Compute the breakeven stock price at the expiration.

(d) Identify the maximum and minimum profit.

(e) Justify your answers above.  

Answer 1

1) Bear Call Spread Involves
Buying an Out of the Money Call Option i.e. Strike price of $170 in this case
Selling an In the Money Call Option i.e. Strike Price of $160 in this case

3) Breakeven Stock price at expiration is $165.1

4) Max Profit = $5.10
Max Loss = $4.90