The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, but you are convinced it is going to break far out of that range in the next 6 months. You do not know whether it will go up or down, however. The current price of the stock is $135 per share, and the price of a 6 month call option at an exercise price of $135 is $10.45.
Required:
If the semiannual risk-free interest rate is 4%, what must be the price of a 6-month put option on P.U.T.T. stock at an exercise price of $135? (The stock pays no dividends.)
What 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?