Suppose a stock has historical volatility of 15% and market is pricing options on that stock based on historical volatility.
You expect that volatility of that stock to increase 25% in the near future. This increased volatility could lead tosubstantial increase or decrease in price of the stock that is currently trading at $35.
You want to profit from increased volatility of this stock by using options in any combinations before price changes to a new value.
A. State how you would formulate an option strategy (number of call/put/stocks, long/short) to take advantage of this situation.
B. Draw profit diagram of your strategy along with the profits of each component.