Purchase Solution

Option strategy

Not what you're looking for?

Ask Custom Question

1. 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 quoted 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 how 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?

2. Employ an arbitrage argument to explain why an American option is always worth at least as much as: (a) a European option on the same asset with the same strike price and exercise date, and (b) its intrinsic value. For both parts (a) and (b) clearly state what strategy is employed to make a profit if the condition is not met.

3. Consider an exchange-traded call option contract to buy 1000 shares with a strike price of $50 and maturity in four months. Explain how the terms of the option contract change when there is: (a) a 25% stock dividend, (b) a 10% cash dividend, and (c) a 2-for-1 stock split.

4. The AAAA Company has 100,000 shares outstanding and 20,000 warrants outstanding.
Each warrant has a maturity of one year and gives the holder the right to buy one new share from AAAA Company for $50. Suppose the premium on a call option (on AAAA Co. stock) with a strike price of $50 and maturity of 1 year is $3. What is the market price for one warrant?

Attachments
Purchase this Solution
Solution Summary

This answer helps to understand the option strategy using call option, put option, and shares.

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
Recent Feedback
  • "I've posted a similar question for another course. It's post 657940, and it's a practice problem that I'd like to use for the final exam. Your help will be greatly appreciated. "
  • "thank you!"
  • "Thank you again Jayant. You are super fast. "
  • "Thank you Jayant. You are appreciated. "
  • "Again, thank you Jayant. You are wonderful. "
Purchase this Solution
Free BrainMass Quizzes
Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

View More Free Quizzes
Related BrainMass Solutions

  • Five Strategies Required for Investing Money

    Growth focused strategy helps to identify an investment option that has high potential of growth. This strategy is helpful to determine such option from which one could achieve its growth objectives (Cagan & O'Connell, 2005).

  • ROA/ROE, butterfly spread , option strategy

    Graph the payoff structure to this strategy. Under what circumstance does this strategy make the most money? 3. You write a call option with X = 50 and buy a call option with x = 60.

  • Stock options for Rick Thompson's investments

    According to Exhibit 2, this option is valued at $1.97. Therefore, in order for this strategy to be profitable, the stock must go below 70 - 1.97 = $68.03 before 90 days pass in order for this strategy to be profitable.

  • Options Strategy for Change in Market Volatility

    The strategy is a bearish strategy. The strategy requires the market direction to be stable. The option involves selling put at a lower strike price and call at a higher strike price.

  • Call and Put Options' Use by Speculators

    The strategy of selling a put option can backfire if the stock price decreases. The maximum loss to a purchaser of a put option is the premium paid for the put option.

  • Straddles and strangles

    Straddle is an option strategy that involves buying a call option and a put option with same strike price and expiration date whereas strangle is an option strategy that involves buying a put option and a call option with same expiration date but different

  • Option Strategy Analysis

    420544 Option Strategy Analysis Firm A is likely to be the target in a takeover attempt by Firm B.

  • Writing options

    242420 Writing Options One reason that writing options can be a viable and profitable investment strategy is that a. the option writer collects the quarterly dividends.

  • create a hedging strategy

    a covered call strategy by selling the calls.

  • Technology Road Inc. - Focus Strategy

    After researching your assigned strategic option(s) (Focus strategy), do you believe your group made the right choice? The strategic option that the company has selected is focus strategy.

View More Related Solutions