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):
Stock A which is traded at $100 now
The 1-year to maturity European call option on stock A with a strike price of $80;
The 1-year to maturity European put option on stock A with a strike price of $80;
The 1-year to maturity European call option on stock A with a strike price of $100;
The 1-year to maturity European put option on stock A with a strike price of $100;
The 1-year to maturity European call option on stock A with a strike price of $120;
The 1-year to maturity European put option on stock A with a strike price of $120;
The 1-year zero-coupon bond with a YTM of 5%;
If you expect no big news on stock A's earnings announcement next week, which option portfolio below should you trade?
Group of answer choices
Sell [2] and [3]
Sell [6] and [7]
Sell [4] and [5]
Buy [1] and sell [2]
Sell [4] and buy [5]
Answer & Explanation
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