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Suppose you are allowed to trade the following financial instruments (assume that each option contract...

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Finance

Suppose you are allowed to trade the following financial instruments (assume that each option contract covers one share of stock A, e.g., a call option allows you to buy one share of A at the strike price if you want):

[1] Stock A which is traded at $80 now [2] The 1-year to maturity European call option on stock A with a strike price of $60; [3] The 1-year to maturity European put option on stock A with a strike price of $60; [4] The 1-year to maturity European call option on stock A with a strike price of $80; [5] The 1-year to maturity European put option on stock A with a strike price of $80; [6] The 1-year to maturity European call option on stock A with a strike price of $100; [7] The 1-year to maturity European put option on stock A with a strike price of $100; [8] The 1-year zero-coupon bond with a YTM of 5%;

If you expect no big news on stock As earnings announcement next week, which option portfolio below should you trade?

Group of answer choices

Sell [1] and buy [8]

Sell [4] and [5]

Sell [2] and [3]

Sell [6] and [7]

Buy [4] and sell [5]

Answer & Explanation Solved by verified expert
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