The Prices of a Five-Month Call Option and a Put-Option

question 4

Essay

The prices of a five-month call option and a put-option, with a strike price of $18, are $5 and $6 respectively. An investor is betting that there will be a big stock price move and considers that the stock price is more likely to increase than decrease. What combination should the investor take? What is the maximum loss in this strategy? _ _ _ _ _ _

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Definitions:

Proportional

Relating to or denoting a relationship where elements vary together at a constant rate and a change in one element results in a corresponding change in another.

Regressive

A term describing a tax system where the tax rate decreases as the taxable amount increases, placing a greater relative burden on lower income earners.

Form 1040EZ

A simplified tax form for individuals with uncomplicated tax situations, previously used to report income to the IRS.

Married Filing Jointly

A tax filing status for married couples who choose to file a single tax return together, combining their incomes and deductions.