Question: You believe that ABC stock will continue to trade flat or in a very slight uptrend. You decide to generate some income while minimizing your

You believe that ABC stock will continue to trade flat or in a very slight uptrend. You decide to generate some income while minimizing your risk using an options strategy. To do so, you sell 5 contracts of ABC Put with the exercise price of $25 and 6 months to expiration and buy 5 contracts of ABC Put with the exercise price $22.50 and the same expiration date. Currently, ABC is traded at $28 per share. The standard deviation of the stock returns is 50% per year. The risk-free interest rate is 3%. Ignoring transaction costs, what is the cost of this strategy? What are your maximum gain and maximum loss with this strategy? Graph the profit diagram for this strategy, assuming that the stock stays between $20 and $30 per share

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!