Consider European style put and call options on Tesla stock. The options have three months to expiration. Suppose the stock price is currently $250 per share and the risk-free rate is 1% per year. 

a.) If the call has an exercise price of $260 and a market price is $50, what is the implied volatility of Tesla stock? If you were an option dealer and a customer wanted to buy one of these calls, how would you hedge your short position in the call?

b.) If the put has an exercise price of $250 and a market price of $60, what is the implied volatility of Tesla stock? If you were an option dealer and a customer wanted to buy one of these puts, how would you hedge your short position in the put?

Answer rating: 100% (QA)

To calculate the implied volatility of Tesla stock we need to make use of an options pricing model such as the BlackScholes model The implied volatili... View the full answer