The price of a stock is $40: Diagram and explain the effects of buying call options and put options

The price of a stock is $40. The price of a one year European put option on the stock with a strike price of $30 is quotes as $7 and the price of a one year European call option on the stock with a strike price of $50 is quoted as $5. Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options.

Draw a diagram illustrating the investor`s profit or loss varies with the stock price over the next year. How does the answer change if the investor buys 100 shares, shorts 200 call options, and buys 200 put options.

Solution Preview

Please refer to the attachments.

The price of a stock is $40. The price of a one year European put option on the stock with a strike price of $30 is quotes as $7 and the price of a one year european call option on the stock with a strike price of $50 is quoted as $5. Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options. Draw a diagram illustrating the investor's profit or loss varies with the stock price over the next year. How does the answer change if the investor buys 100 shares, shorts 200 call options, and buys 200 put options.
P0 = 40
Xp = 30
Put = 7
Xc = 50
Call = 5

- If the stock price drops below its strike price of put at $30, the put is in the money and the investor will use the put to hedge the price. He will then sell the 100 shares at ...

Solution Summary

The solution provides a detailed explanation of the results including mathematical calculations. The diagrams are represented in Excel to show potential profit and loss.

Thestockprice of Garner stock is $40. There is a call option on Garner stock that is at the money, with a premium of $2.00. There is a put option on Garner stock that is at the money, with a premium of $1.80. Why would investors consider writing this call option and this put option? Why would some investors consider buying th

A stock is worth $20 today, and it may increase or decrease $5 over the next year. If the risk-free rate of interest is 6 percent, calculate the market price of the at-the money putandcalloptions on this stock that expire in one year. Which option is more valuable, theput or thecall? Is it always the case that a call option

A stock has a spot price of $35. Its May options are about to expire. One of its puts is worth $5 and one of its calls is worth $5. The exercise price of theput must be ___A__ andthe exercise price of thecall must be ___B__. (please show work for A & B)

1. How are putoptions used by speculators? can you describe the conditions in which their strategy would backfire. What is the maximum loss that could occur for a purchaser of a put option?
2. Now answer the above for calloptions instead of putoptions.

Suppose that theprice of a non-dividend paying stock is $32, its volatility is 30%, andthe risk-free rate for all maturities is 5% per annum. Use derivagem to calculate the costs of setting up the following positions. In each case provide a table showing the relationship between the profit and final stockprice. Ignore the imp

Suppose that theprice of a non-dividend-paying stock is $42, its volatility is 35%, andthe risk-free rate for all maturities is 6% per annum. Use Derivagem (Analytic European) to calculate the cost of setting up the following positions. Assume Tree Steps = 100. In each case provide a spreadsheet showing the relationship betwee

QUESTION 1
Focus on the June 445 call. Suppose you bought this call at theprice indicated.
How high must AAPL's price rise at expiration to break even on this option?
QUESTION 2
Now, look at the June 445 put. Provide a table showing the profit at expiration to a put buyer across a range of stockprices.
QUESTION 3

1. Theprice of a stock is $40. Theprice of a one-year European put option on thestock with a strike price of $30 is quoted as $7 andtheprice of a one-year European call option on thestock with a strike price of $50 is quoted as $5. Suppose that an investor buys 100 shares, shorts 100 calloptions, and buys 100 putoptions.