Problem:
A put and a call have the following terms: Call: strike price $ 30.00 Term: 3 months Price: $ 4.00 Put: strike price $ 30.00 Term: 3 months Price: $ 4.00 The price of the stock is currently $29.00. You sell the stock short. Illustrate how to use the call or the put to reduce your risk exposure. Remember option contracts are purchased in lots of 100.
Required:
Question 1: What is the maximum possible profit on the position?
Question 2: What is the maximum possible loss on the position?
Note: Provide support for your underlying principle.