Question

13. The common stock of Xerox Corporation has been trading in a narrow price range for the past month. You belie it is going to break far out of that range in the next month (June), though you don’t know for sure whether it will go up or down.   The current price of Xerox is $65 per share. The following price quotations on Xerox options which are traded at CBOE are available.

                                                                                        Call                              Put            -    

           Stock Price    Strike Price     Expiration       Volume          Last         Volume    Last

                   65                60                June                 1563               5              1425        3

               

                         

Can you formulate a strategy to exploit this soon-to-be volatile stock price? How much would be your profits, if, at expiration, the price of a share of Xerox stock is $40, $60, and $80 respectively?

a.   -$8, $5, $10

2. -$8, -$2, $8
3. $12, -$8, $12
4. $12, -$8, -$8

Answer 1

IF ANY QUERY, FEEL FREE TO ASK Solution As stock is going to be volatile and break the range, but not sure wether it will go up or down. Hence, we would buy both Call and put option. We know that When we buy Put option, Payoff is Strike price - Stock Price, if negative then 0 When we buy Call option, Payoff is Stock Price -Strike price, if negative then 0 Profit is equal to Total Payoff - Total Premium paid Total Premium paid Premium paid on call option + Premium paid on put option 5+3 Profit Loss Calculation Strike Price Call 60; Put 60 Payoff - Put Payoff - Call Total Total Profit/ Price Option (Buy) | Option (Buy) Payoff Premium Loss 40 20 0 20 8 12 60 0 00 8 -8 80 0 20 20 8 12 where, Total Payoff = Payoff Put Option + Payoff Call Option Profit / Loss = Total Payoff - Total Premium 000000 Hence, $12, $-8, $12 is correct option