Question

You sell two ABC August 50 call contracts and one ABC August 50 put contract. The call premium is $1.25 and the put option is $4.50. Your strategy will pay off only if ABC stock price in August is:

a. between $46.5 and $57

b. between $43 and $53.5

c. between $44.25 and $55.75

d. between $43 and $57

Answer 1

The sold call and put options have break-even points of $51.25 and $45.50, respectively. The strategy pays off only if the ABC stock price in August stays between $45.50 and $51.25, which is not listed in the provided options.

Step-by-step explanation:

The question involves the selling of options, which is a financial transaction within the stock market. You sold two ABC August 50 call contracts for a premium of $1.25 each and one ABC August 50 put contract for a premium of $4.50. To determine the range where your strategy will pay off, we have to calculate the break-even points for both the calls and puts that you have sold.

For the call options, you received a total premium of $1.25 × 2 × 100 = $250 (since each contract represents 100 shares). If the stock's price rises above $50, you are at risk of having the option exercised against you. Therefore, to cover the premium you received and break even, the ABC stock price must not exceed $50 + $1.25 = $51.25 by August.

For the put option, you were paid a premium of $4.50 × 100 = $450. If the stock price falls below $50, the put could be exercised, and you would be obliged to buy the stock at $50. Subtracting the premium from the strike price, your break-even point on the downside would be $50 - $4.50 = $45.50.

Your overall strategy pays off as long as ABC's stock price in August stays between the two break-even points, which are $45.50 and $51.25. Therefore, the correct answer is none of the above as the given options do not include this range.

Answer 2

Your strategy will pay off if the stock price in August is between $48.75 and $54.50.

Step-by-step explanation:

To determine when your strategy will pay off, we need to consider the strike price and the premium for both the call and put options. The strike price for both contracts is $50. If the stock price in August is below $50, the call options will expire worthless and you will keep the premium received for selling them. If the stock price is above $50, the put option will expire worthless and you will also keep the premium received for selling it. Therefore, your strategy will pay off if the stock price in August is between $50 - $1.25 and $50 + $4.50. This translates to a stock price between $48.75 and $54.50.