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Question
you obtain the following information concerning a stock, a call option, and a put option
price of the stock $42
strike price (both options) $40
price of the call $6
price of the put $3
expiration date three months
you want to purchase the stock but also want to use an option to reduce your risk of loss.
a. do you purchase the put or the call or do you sell the put or the call?
b. what is the cash inflow or outflow from your position?
c. what is profit or loss if the price of the stock stagnates and trades for $42 after three months?
d. what is profit or loss if the price of the stock trades for $50 or $100 after three months?
e. what is profit or loss if the price of the stock trades for $30 after three months?
f. what is the worst case scenario?
g. if you want to retain the position, what must be done after three months have passed?
Answer
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