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 3 months. You
do not know whether it will go up or down, however. The current
price of the stock is $155 per share, and the price of a 3-month
call option at an exercise price of $155 is $5.40.
a. If the risk-free interest rate is 8% per
year, what must be the price of a 3-month put option on P.U.T.T.
stock at an exercise price of $155? (The stock pays no dividends.)
(Do not round intermediate
calculations. Round your answer to 2 decimal
b. A straddle would be a simple options
strategy to exploit your conviction about the stock price’s future
movements. How far would it have to move in either direction for
you to make a profit on your initial investment? (Round
your intermediate calculations and final answer to
2 decimal places.)
Total cost of the straddle?