# If you anticipate that the price of the stock will rise, you could (1) buy the stock, (2)

Anonymous

Question description

If you anticipate that the price of the stock will rise, you could (1) buy the stock, (2) buy a call, (3) sell the covered call, or (4) sell the put. All four positions may generate profits if the price of the stock rises, but the cash inflows or outflows, the amount of any gains, and the potential losses differ for each position. Currently, are trading for \$10.50 and \$8.25, respectively.

A) What are the cash inflows or outflows associated with each of the four positions?

B) construct a profit/loss profile for each at the following prices of the stock

profit/loss

Price of the stock Bought the stock Covered Call Bought the call sold the Put

\$110

100

95.50

90

86

80

76.75

75.50

70

65

As this profile illustrates, each strategy produces a gain but the amounts and potential losses differ

C) what are the prices of the stock that generate breakeven for each position?

D) Compare the cash inflows/outflows, profits, and potential loss from the covered call and sale of the put. Which is better if you are able to invest any cash inflows and earn\$1.25?

E) Which strategy has the smallest potential dollar loss?

F) What price of the stock produces a loss on all four positions?

G) Which position generates he highest possible gain in dollar and in percentage terms?

H) suppose the price of the stock declines, and the put is exercised (i.e, you have to buy the stock). Since the option is exercised, what is your cost basis of the stock? Compare this cost basis to your initially buying the stock instead of selling the put.

(Top Tutor) Studypool Tutor
School: UT Austin
Studypool has helped 1,244,100 students
flag Report DMCA

Brown University

1271 Tutors

California Institute of Technology

2131 Tutors

Carnegie Mellon University

982 Tutors

Columbia University

1256 Tutors

Dartmouth University

2113 Tutors

Emory University

2279 Tutors

Harvard University

599 Tutors

Massachusetts Institute of Technology

2319 Tutors

New York University

1645 Tutors

Notre Dam University

1911 Tutors

Oklahoma University

2122 Tutors

Pennsylvania State University

932 Tutors

Princeton University

1211 Tutors

Stanford University

983 Tutors

University of California

1282 Tutors

Oxford University

123 Tutors

Yale University

2325 Tutors