You are an investor who would like to create a combination by taking positions in THREE...

 

Transcribed Image Text:

You are an investor who would like to create a combination by taking positions in THREE OPTIONS. The options available to you are shown on the table below. You would like the profit from this strategy to match the profit diagram provided below. Option Type Strike Price Call Pratit Put Put 10 15 10 15 20 20 Option Price 5 2 5 ST (a) Describe the combination of THREE OPTIONS that will yield the profit strategy shown above. Note that you can take Long or Short positions in the options. Demonstrate using a payoff-table that your strategy is correct. (b) If the underlying security is trading at 15 dollars, what do you believe about the stock price in the future? Compared to an investor who has a portfolio that contains only a short position in the call option, is your portfolio put a stronger or a weaker weight on your belief? Why? You are an investor who would like to create a combination by taking positions in THREE OPTIONS. The options available to you are shown on the table below. You would like the profit from this strategy to match the profit diagram provided below. Option Type Strike Price Call Pratit Put Put 10 15 10 15 20 20 Option Price 5 2 5 ST (a) Describe the combination of THREE OPTIONS that will yield the profit strategy shown above. Note that you can take Long or Short positions in the options. Demonstrate using a payoff-table that your strategy is correct. (b) If the underlying security is trading at 15 dollars, what do you believe about the stock price in the future? Compared to an investor who has a portfolio that contains only a short position in the call option, is your portfolio put a stronger or a weaker weight on your belief? Why?

Answer rating: 100% (QA)

Lets think through this stepbystep The profit diagram shows Profit of 0 if the stock p... View the full answer