The common stock of the Apple 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 three months. You do not know whether it will go up or down, however. The current price of the stock is $187 per share, and the price of a three-month at-the-money put option on Apple is $10.
If the risk-free interest rate is 2% per year, what must be the price of a 3-month at-the-money call option on the Apple stock? The stock pays no dividend.
What would be a simple options strategy to exploit your conviction about the stock price’s future movements? To receive a full credit, you should
i. Determine which options are involved
ii. Construct a payoff table and show it in this exam
iii. Show payoff of your strategy on a graph
How far would the price of the Apple stock have to move in either direction for you to make a profit on your initial investment?