On Friday, OCT 5, 2007 Mr. AJ bought 100,000 shares of Yahoo for $27.90/share. At the same time, AJ bought 1,000 of the T = OCT, K = $27.50 puts for p = $.90/share and sold 1,000 of the T = OCT, K = $27.50 calls for $1.40/share. All options are CBOE options thus, each covers 100 shares of the underlying stock. These options expire on OCT 18, 2007 i.e. in exactly 14 days.

 

1. Show the complete table of cash flows and P/L at expiration of AJ's strategies.
2. Explain why or why not, AJ's strategy is an arbitrage profit marking strategy.

Answer rating: 100% (QA)

To determine AJs profit or loss at expiration we need to calculate the payoff from each leg of the strategy and then add them up Payoff from buying 10... View the full answer