either $150 or $25. An leeway to purchase y units of the stock at time one can be purchased at the cost of cy. Assume that the strike price is $125.
a) what should c be within order for here to be no sure win?
b) If c=4, explain how you can guarantee a sure win
Answers: We have to breed a few simplifying assumptions to solve the problem.
(1) There is no chance that an ex-dividend date will turn out before expiration.
(2) There is no prospect that a short stock position will have to be covered prior to expiration.
(3) Transaction costs are insignificant and not included.
(4) Long stock plus short opportunity combinations are not being considered since they would require unrealistic picking pricing.
With those assumptions, the only road to make a profit next to the stock at $25 is if we have a short position within the stock, so we immediately know that we short some number of shares, and surrounded by order to formulate a profit with the stock at $150 we own to have adequate options to overcome the $100 per share loss the short stock position will experience if the shares travel to $150. Since the lower limit for the leeway price is zero, the maximum profit per share possible from the option is $25 per share. Consequently we need option on at least four times as abundant shares as the number of shares we sold short.
Also, since the with profit from the short stock position is $25 if the stock closes at $25, we know the cost of the option must not exceed $25 per share shorted.
<<<a) what should c be in establish for there to be no sure win?>>>
To be sure at hand is no sure win the option requests to be priced at $6.25 ($25.00 / 4) or higher.
<<<b) If c=4, explain how you can guarantee a sure win>>>
Sell n shares short
buy option on 5n shares
For example, short 100 shares for $5,000 and buy options on 500 shares for $2,000.
Your network credit to open the position is $5,000 - $2,000 = $3,000
If the stock is at $25 after one time term the options will expire worthless and it will cost $2,500 to buy the stock to cover.
If the stock is at $150 the option will have an intrinsic merit of $25 per share, or $12,500, and it will cost $15,000 to cover the short stock position. That makes the total cost to close both positions $15,000 - $12,500 = $2,500.
Thus next to the stock at either $25 or $150 it will cost $2,500 to close the position. Since the initial credit be $3,000 the net profit will be $500.
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a) what should c be within order for here to be no sure win?
b) If c=4, explain how you can guarantee a sure win
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Answers: We have to breed a few simplifying assumptions to solve the problem.
(1) There is no chance that an ex-dividend date will turn out before expiration.
(2) There is no prospect that a short stock position will have to be covered prior to expiration.
(3) Transaction costs are insignificant and not included.
(4) Long stock plus short opportunity combinations are not being considered since they would require unrealistic picking pricing.
With those assumptions, the only road to make a profit next to the stock at $25 is if we have a short position within the stock, so we immediately know that we short some number of shares, and surrounded by order to formulate a profit with the stock at $150 we own to have adequate options to overcome the $100 per share loss the short stock position will experience if the shares travel to $150. Since the lower limit for the leeway price is zero, the maximum profit per share possible from the option is $25 per share. Consequently we need option on at least four times as abundant shares as the number of shares we sold short.
Also, since the with profit from the short stock position is $25 if the stock closes at $25, we know the cost of the option must not exceed $25 per share shorted.
<<<a) what should c be in establish for there to be no sure win?>>>
To be sure at hand is no sure win the option requests to be priced at $6.25 ($25.00 / 4) or higher.
<<<b) If c=4, explain how you can guarantee a sure win>>>
Sell n shares short
buy option on 5n shares
For example, short 100 shares for $5,000 and buy options on 500 shares for $2,000.
Your network credit to open the position is $5,000 - $2,000 = $3,000
If the stock is at $25 after one time term the options will expire worthless and it will cost $2,500 to buy the stock to cover.
If the stock is at $150 the option will have an intrinsic merit of $25 per share, or $12,500, and it will cost $15,000 to cover the short stock position. That makes the total cost to close both positions $15,000 - $12,500 = $2,500.
Thus next to the stock at either $25 or $150 it will cost $2,500 to close the position. Since the initial credit be $3,000 the net profit will be $500.
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