You Obtain the Following Information Concerning a Stock, a Call

question 45

Essay

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

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Definitions:

Elicited

Drawn out or brought forth in response to a specific stimulus or set of circumstances.

Classical Conditioning

The acquisition of knowledge through the linkage between a stimulus found in the environment and one that happens naturally.

Resistance to Extinction

The resistance to disappearance of a conditioned response despite the lack of reinforcement.

Text Messages

Written messages sent or received over mobile phones or similar devices, utilizing short message service (SMS) technology.