An investor believes that there will be a small change in a stock price but she is
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Question:
An investor believes that there will be a small change in a stock price but she is unsure of whether it will be a small drop or a small increase. A call with a strike price of $50 costs $6. A put with the same strike price and expiration date costs $4.
a) Given his beliefs, which one of the following strategies makes sense for the investor? Choose one and explain your choice
1. A Short (or, reverse) Calendar spread
2. A Box spread
3. A Short straddle
4. A Bear spread using Calls
b) Construct a table that shows the profit from the strategy you chose?
c) For what range of stock prices would the strategy you chose in a) lead to a loss?
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