Certain common stock currently sells

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Reference no: EM13913598

A certain common stock currently sells for $50. A call option on that stock with X = $50 and an expiration in one year costs $6.41. A put option on that stock, also with X = $50 and a one-year expiration costs $5.42.

Explain how the payoff of buying 1 share of stock is very similar to the payoff of simultaneously buying one call and selling one put. Buying one share of stock requires $50, but buying one call and selling one put requires just $0.99. If the payoffs of these two investment strategies are very similar, but their costs are very different, is it always better to use the “buy a call, sell a put” strategy rather than just buying the stock? Why or why not?

Reference no: EM13913598

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