question archive The common stock of the P
The common stock of the P
Subject:FinancePrice:2.86 Bought3
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 three months. You do not know whether it will go up or down, however. The current price of the stock is $120 per share, the price of a three-month call option with an exercise price of $120 is $9, and a put with the same expiration date and exercise price costs $7.
How far would the price have to move in either direction for you to make a profit on your initial investment?
Stock price must move up above $ , or move down below $ for you to make a profit.
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Stock price must move up above $136 , or move down below $104 for you to make a profit.
Step-by-step explanation
In order to hedge risk, you should buy both the call and put options.
The premium paid = $9 + $7 = $16
The premium paid is the amount by which the stock have to move in either direction for the profit on call or to cover the investment cost on put.
In order to earn profit Price must move up above $136 (120+16) or move down below $ 104 (120-16).
