The common stock of the PUTT Corporation has been trading in

The common stock of the P.U.T.T. Corporation has been trading in a narrow price range in the next 3 months. You do not know whether it will go up or down, however, the current price of the stock is $100 per share, the price of a 3-month call option with an exercise price of $100 is $10 and a put with the same expiration date and exercise price cost $7. A. What would be a simple options strategy to exploit your conviction about the stock price\'s future movements? B. How far would the price have to move in either direction for you to make a profit on your initial investment?

Solution

Since the stock is expected to trade in a narrow price range, one can sell call as well as put with a strike price of $100nd get options value of $10+$7=$17, stock is not likely to go down or go up the options would expire worthless or the payout shall be less, and one can gain profit.

Maximum profit: when the options expire worthles= $10+$7=$17 STOCK PRICE CAN MOVE TO $(100-17)=$83 or (100+17)=$117 in either direction before one loses money