Conviction about the stock price future movements

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Reference no: EM131562126

The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next 6 months. You do not know whether it will go up or down, however. The current price of the stock is $120 per share, and the price of a 6-month call option at an exercise price of $120 is $8.89.

a. If the risk-free interest rate is 8% per year, what must be the price of a 6-month put option on P.U.T.T. stock at an exercise price of $120? (The stock pays no dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Put-call parity $

b. What would be a simple options strategy to exploit your conviction about the stock price’s future movements? How far would it have to move in either direction for you to make a profit on your initial investment? (Round your intermediate calculations and final answer to 2 decimal places. Omit the "$" sign in your response.)

Total cost of the straddle $

Reference no: EM131562126

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