Question

State whether you agree or disagree with the following statement. Explain why. “A stock price has...

State whether you agree or disagree with the following statement. Explain why.

“A stock price has been quite volatile lately, and the market's expectation is that high volatility will continue. You, on the other hand, expect the stock's price volatility to decrease significantly in the next three months. If you are not sure of the direction of the price change, you can speculate on this expectation by selling both call and put options (not just calls or just puts) on the stock as opposed to buying call and put options on the stock”.

(Note: You are only considering call and put positions on this stock. You are not considering other ways to profit from your expectation.)

(Maximum 3 sentences, maximum 100 words.)

0 0
Add a comment Improve this question Transcribed image text
Answer #1

I agree with the above statement

When volatility decreases the price of stocks tends to move in a range, this causes Option to loose their premium normally known as time decay. Thus when volatility comes down sellers of the option makes money. Hence the strategy of selling both call and option will result in profitability if volatility is low and stock moves in a fixed range

Add a comment
Know the answer?
Add Answer to:
State whether you agree or disagree with the following statement. Explain why. “A stock price has...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • The market price of Loblaw Corporation stock has been very volatile and you think this volatility...

    The market price of Loblaw Corporation stock has been very volatile and you think this volatility will continue for a few weeks. Thus, you decide to purchase a 1-month call option contract with a strike price of $47 and an option price of $1.93. You also purchase a 1-month put option contract on the stock with a strike price of $47 and an option price of $1.28. What will be your total profit or loss on all the transactions related...

  • (Ch. 4 Level of Interest Rates) State whether you agree or disagree with the following statement:...

    (Ch. 4 Level of Interest Rates) State whether you agree or disagree with the following statement: “Implementing structural reforms that make it easier and less costly to open a business and in general foster a more business-friendly climate in a given country is likely to put upward pressure on real interest rates in the country in the short run, all else equal”. Explain your answer. (Maximum 3 sentences, maximum 100 words.)

  • State whether you agree or disagree with the statement below. Explain you answer. "Assuming no liquidity...

    State whether you agree or disagree with the statement below. Explain you answer. "Assuming no liquidity premium, no maturity preferences, no default risk, and no changes in the expected real rate of return, an upward sloping yield curve implies that investors expect inflation to increase in the future." (Maximum 3 sentences, maximum 100 words.)

  • please just do question 7. thank you Silicon MicroSystems, Inc. (SMSI) stock is currently selling for...

    please just do question 7. thank you Silicon MicroSystems, Inc. (SMSI) stock is currently selling for $100 and the firm pays no dividends. The stock's volatility is 0.30 and the risk-free rate is 8%. Consider the following 6-month call and put options on SMSI stock (assume that contract size is 1 share): 6. Call 1 Call 2 Call 3 Strike $90 Price $12.817 $6.999 $3.380 Delta Gamma $100$110 0.7690.548 0.333 ma 0.0180.024 0.022 Put 1 90 Put 2 Put 3...

  • QUESTION 14 You expect that the stock of GoPro, currently trading at $73 per share, will...

    QUESTION 14 You expect that the stock of GoPro, currently trading at $73 per share, will be volatile in the next three months, and the price will change significantly. However, you do not know the direction of the change. Thus, you decide to enter into a long straddle position using 3 month options, buying both a put and a call contract struck at $73. The premium on both options is $2.4 per share. If at maturity, GoPro is trading at...

  • Use the following information for Q10, Q11 and Q12. It is July and Toyota's stock price...

    Use the following information for Q10, Q11 and Q12. It is July and Toyota's stock price is ¥6,561 on the Tokyo Stock Exchange. Your analysis suggests that Toyota's stock is overvalued and is worth 9% less than it trades for today. There are September expiration call and put options with a strike of ¥6300. The call premium is ¥390 per share and the put premium is ¥121 per share. The contract is for 1,000 shares. You decide to speculate on...

  • The current stock price of RWJ is $312.32. You have the following quotes on RWJ options:...

    The current stock price of RWJ is $312.32. You have the following quotes on RWJ options: Expiration Exercise Price Calls Puts Dec 305 27.40 8.25 Jan 310 18.43 14.15 Feb 315 19.55 20.00 May 320 25.55 30.40 a. Which of the options are in the money? b. What is the exercise value of a February call option with a strike price of $315? c. Suppose you buy 10 contracts of the February 315 call option. How much will you pay,...

  • 2. Exercise value and option price The value derived from exercising an option immediately is the...

    2. Exercise value and option price The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock's price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or "issue" new options, which is called writing options. The...

  • 2. Exercise value and option price The value derived from exercising an option immediately is the...

    2. Exercise value and option price The value derived from exercising an option immediately is the exercise value. No rational investor would exercise an option that is out-of-the-money, so the minimum exercise value is zero. The following table provides information regarding options on ABC Corp. stock. Because the stock's price is volatile, investors trade options to either hedge their positions or speculate on price movements. Investors can either buy options or "issue" new options, which is called writing options. Consider...

  • Suppose you think Apple stock is going to appreciate substantially in value in the next year. Say the stock's current price, Sa, is $125, and a call option expiring in one year has an exercise pr...

    Suppose you think Apple stock is going to appreciate substantially in value in the next year. Say the stock's current price, Sa, is $125, and a call option expiring in one year has an exercise price, X, of $125 and is selling at a price, C, of $13. With $39,000 to invest, you are considering three alternatives. a. Invest all $39,000 in the stock, buying 312 shares. b. Invest all $39,000 in 3,000 options (30 contracts) c Buy 100 options...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT