Reference no: EM132796071

1) Regina Inc stock is currently valued at $39. An investor buys a single call option on the stock with a strike price of $40 and sells a single call option on the stock with a strike price of $42.50. The market prices of the options are $2.75 for the bought call optioin and $1.50 for the written call. The options have the same maturity date. Indicate what type of option trading strategy is, the minimum profit, and maximum profit. Draw a diagram to demonstrate this.

2) The current price of a stock is $94, and three-month call options with a strike price of $95 currently sell for $4.70. An investor who feels that the price of the stock will increase is trying to decide between buying 100 shares and buying 2,000 call options (20 contracts). Both strategies involve an investment of $9,400. What advice would you give? How high does the stock price have to rise for the option strategy to be more profitable? Draw a diagram to compare the two strategies.

3) A call with a strike price of $60 costs $6. A put with the same strike price and expiration date costs $4. Construct a diagram (a graph) that shows the profit from a straddle. For what range of stock prices would the straddle lead to a loss?

4) Three put options on a stock have the same expiration date and strike prices of $55, $60, and $65. The market prices are $3, $5, and $8, respectively. Explain how a butterfly spread can be created. Construct a table showing the profit from the strategy. For what range of stock prices would the butterfly spread lead to a loss?