Question

8 trading / facta in October, an investor purchases an ABC 50 call with December expiration for $2.00/share. In Novem (spot-rok) the share price of ABC stock increases. In November, ABC 50 calls are trading for $6.00, ABC 60 calls are trading for $1.00, and ABC 60 puts are trading for $3.00. Identify the follow-up strategy that could be taken in November that would provide constant profits if the stock price was between $50 and $60 at expiration, and would provide increasing profits if the stock fell below $50 or increased above $60 by expiration a) Do nothing: Hold the original 50 call and make no further trades (t-premingent more (spot -state, o)*10 b) Liquidate: Sell the original 50 call and make no further trades c) Spread: Hold the original 50 call and sell a 60 call d) Roll-up: Sell the original 50 call and purchase multiple 60 calls e) Combination: Hold the original 50 call and purchase a 60 put 3 - 1,36 + Max (197 - 182.50 ,0) 100 -1,84 may (45,-)

Need help thanks

Answer 1

Option E is the correct answer here.

This is the straddle strategy wherein the investor limits his losses to the price paid to get options but the possibility to earn profits is immense if the stock goes below $50 and above $60

- If the price of the stock on expiration date goes below $50, the investor could buy the stock at market price and use his put option to sell it at $60

- If the price of the stock on expiration date remains between $50 and $60 , the investor could use both call and put option to buy it at $50 and sell it at $60 for confirmed profit of $10 per share.

- If the price of the stock on expiration date goes above $60, the investor could use his call option to buy it at $50 and sell it at the market price.

Thus, in all 3 scenarios, the investor will be able to earn profits.