Derivatives :

manabmajumdar20
Posts: 2
Joined: Tue Jul 26, 2016 3:39 am

Derivatives :

Postby manabmajumdar20 » Sat Nov 12, 2016 11:45 am

An investor with $5,000 to invest believes that the price of ABC Corp. stock will appreciate by $7 to $95 in two months. The two-month at-the-money put on one share of ABC stock costs $1.76, whereas the two-month at-the-money call costs $1.56. To profit from his view on ABC stock, he will most likely:

A) buy calls on shares of ABC
B) sell puts on shares of ABC.
C) sell calls on shares of ABC.

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: Derivatives :

Postby edupristine » Sat Nov 12, 2016 12:28 pm

Hi Manab

Option A is correct - buy calls on shares of ABC.
Buying a call gives the owner the right to buy the stock at the exercise price. The investor predicts that the stock will increase to $95 at the end of two months. He will likely be able to sell his calls for at least $7 and realize a profit.


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