P11. A put and a call have the following terms: Call: Strike price $30 Term thre

Question

P11. A put and a call have the following terms: Call: Strike price $30 Term three months Price $3 Put: Strike price $30 Term three months Price $4 The price of the stock is currently $29. You sell the stock short. Illustrate how to use the call or the put to reduce your risk exposure. a) What is the maximum possible profit on the position? b) What is the maximum possible loss on the position? c) What range of stock prices generates a profit? d) What advantage does this position offer? Please Show Work. Thanks

Explanation / Answer

we should buy call option because we are in short position a) if the stock price decrease below $30 we won't exercise the option and maximum profit is when stock price becomes 0 maximum profit = 29 - 3 = $ 26 b) maximum loss = $3

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