Suppose that the current market price of the stock of Company X is $ 872. Suppose...

Suppose that the current market price of the stock of Company X is $ 872. Suppose that you expect that the news release by Company X will cause at least ca 10% movement in the market price of its stock by Dec. 4th, 2020. However, you are not sure whether there will be a downward adjustment or an upward adjustment of the market price. Describe briefly a trading strategy involving call and (or) put options that accounts for this expectation. Use graph to demonstrate the payoffs and identify clearly your pay-offs from each option position as well as from the overall position at the date of expiry (please consider the price range of $600 to $1200 on the graph) and mark clearly the numerical values of break-even stock prices related to your strategy. Suppose that the call and put options, which are available on the market and can be used for the construction of trading strategy, are following:

Company X's stock: Call Options, Expire on Dec. 4, 2020
Call Option
Strike	Bid	Ask
785	88,30	90,60
875	6,50	6,90
960	1,30	1,40

Company X's stock: Put Options, Expire on Dec.4, 2020
Put option
Strike	Bid	Ask
785	1,20	1,80
875	22,10	22,70
960	87,60	89,50

Expert Solution

jeff jeffy answered 2 years ago

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