Assume that you feel it is likely that the stock price for a given firm will...

  

Transcribed Image Text:

Assume that you feel it is likely that the stock price for a given firm will move up modestly over the next two months up to about $120, from the current stock price of $104. You are willing to enter into a highly speculative strategy to try and earn a profit, using some of the below options. (3 parts: a, b, and c) Exercise Price 100 110 Call $10.80 $6.30 Put $5.70 $11.00 What strategy would you choose from Chapter 7 (its name) to match this belief, and what would be your option transactions to set it up? (Choose an option strategy where you would have to spend something at time-0 to set it up, in the hopes of earning a return at option expiration T. (As usual, scale the option transactions by 1 standard option contract.) b) Draw the profit profile for this strategy in the below graph, assuming that you hold the position until option expiration. In this graph, make sure and show: (i) the maximum potential profit in dollars, (ii) the worst possible loss in dollars, and the (iii) the terminal breakeven stock price. (Denote the actual dollar values in the graph below.) TU $100 $110 ST c) What is your maximum possible percentage return on this strategy, relative to your initial net investment in the options? Assume that you feel it is likely that the stock price for a given firm will move up modestly over the next two months up to about $120, from the current stock price of $104. You are willing to enter into a highly speculative strategy to try and earn a profit, using some of the below options. (3 parts: a, b, and c) Exercise Price 100 110 Call $10.80 $6.30 Put $5.70 $11.00 What strategy would you choose from Chapter 7 (its name) to match this belief, and what would be your option transactions to set it up? (Choose an option strategy where you would have to spend something at time-0 to set it up, in the hopes of earning a return at option expiration T. (As usual, scale the option transactions by 1 standard option contract.) b) Draw the profit profile for this strategy in the below graph, assuming that you hold the position until option expiration. In this graph, make sure and show: (i) the maximum potential profit in dollars, (ii) the worst possible loss in dollars, and the (iii) the terminal breakeven stock price. (Denote the actual dollar values in the graph below.) TU $100 $110 ST c) What is your maximum possible percentage return on this strategy, relative to your initial net investment in the options?

Answer rating: 100% (QA)

a I would choose a bull call spread strategy to match this belief tha... View the full answer