Explanation:
Shorting the ABC call with the $55 strike price will be out-of-the-money; thus, the profit will be the option premium ($1.10). Going long the XYZ put option with the $10 strike price will be in-the-money, and the profit will be: $10 - 8.13 - 0.75 = $1.12. Thus, the total profit is: $1.10 + $1.12 = $2.22.
(Book 3, Module 30.2, LO 30.g)
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Question 36
A client is currently following two stocks in the pharmaceutical industry: ABC and XYZ. He is bullish on ABC, but bearish on XYZ. ABC is currently priced at $53.60 and XYZ is currently priced at $9.80. He is considering an options strategy to capitalize on his expectations. The client gathers the following three months of data on put and call options for both stocks:
| ABC: | |||
|---|---|---|---|
| Call | Strike | Put | |
$8.50 | $45.00 | $0.20 | |
$4.40 | $50.00 | $0.50 | |
$1.10 | $55.00 | $2.75 | |
| XYZ: | |||
| Call | Strike | Put | |
$2.50 | $7.50 | $0.15 | |
$0.55 | $10.00 | $0.75 | |
$0.10 | $12.50 | $2.75 |
In three months, assume ABC has increased in price by $1.00 while XYZ has dropped by $1.67. Which of the following strategies would have been the most profitable in three months?
A
Short the ABC put option with the $45 strike price and short the XYZ call option with the $7.50 strike price.
B
Go long the ABC put option with the $45 strike price and go long the XYZ call option with the $7.50 strike price.
C
Go long the ABC call option with the $55 strike price and go short the XYZ put option with the $10 strike price.
D
Short the ABC call option with the $55 strike price and go long the XYZ put option with the $10 strike price.
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