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 3 months. You do not know whether it will go up or down, however. The current price of the stock is $90 per share, and the price of a 3-month call option at an exercise price of $90 is $8.69.
a. If the risk-free interest rate is 7% per year, what must be the price of a 3-month put option on P.U.T.T. stock at an exercise price of $90? (The stock pays no dividends.)
Put Call Parity =
b. A straddle 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.)
Total Cost of the Straddle =