You are managing a share portfolio for a long-term investor, APT Superannuation. Given its long-term investment profile, APT is willing to invest in shares that have strong growth prospects and is not concerned about income. QUC Group shares (ASX Code QUC) have been range trading at around $5 for the last few months. QUC is a mining company with excellent prospects over the long term but short term growth prospects are limited so you believe that the share will continue to range trade for the next 6 to 12 months. It is not paying a dividend at the moment and is unlikely to pay a dividend for the foreseeable future. The three-month risk free rate is 3% per annum convertible quarterly and at-the-money put options are quoted at $0.50.
a. At what price would you expect a three month at-the-money call option to be quoted?
b. Recommend a strategy using put and call options that would take advantage of your view that QUC will continue to range trade at around $5.
c. What is the maximum profit you could make from this strategy?
d. At what stock price(s) at expiry does this transaction break even?
e. Are there any other issues you may want to consider before implementing this strategy?