Pricing options on that stock based on historical volatility

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Suppose a stock has historical volatility of 15% and market is pricing options on that stock based on historical volatility. You expect that volatility of that stock to increase 25% in the near future. This increased volatility could lead tosubstantial increase or decrease in price of the stock that is currently trading at $35. You want to profit from increased volatility of this stock by using options in any combinations before price changes to a new value.

A. State how you would formulate an option strategy (number of call/put/stocks, long/short) to take advantage of this situation.

B. Draw profit diagram of your strategy along with the profits of each component.

Reference no: EM131511702

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