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Suppose a trader buys a call and a put option on a stock with a strike price of $60 and time to maturity of three months (t=0.25). Suppose that the current stock price of the underlying is also $60, the annual risk-free rate is 2% and the annual standard deviation of the underlying price change is 20%.
a) Suppose that the price increases to $50 at maturity, what is the profit or loss of this strategy.
b) What price does the trader needs the volatility to achieve in order to profit?
c) Now if another trader buys a call option with a strike price of $62 and a put option with a strike price of $58 with everything else the same, what price does the trader needs the volatility to achieve in order to profit?
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