6. A certain common stock currently sells for $50. A call option on that stock w

Question

6. A certain common stock currently sells for $50. A call option on that stock with X = $50 and an expiration in one year costs $6.41. A put option on that stock, also with X = $50 and a one-year expiration costs $5.42.

Explain how the payoff of buying 1 share of stock is very similar to the payoff of simultaneously buying one call and selling one put. Buying one share of stock requires $50, but buying one call and selling one put requires just $0.99. If the payoffs of these two investment strategies are very similar, but their costs are very different, is it always better to use the “buy a call, sell a put” strategy rather than just buying the stock? Why or why not?

Explanation / Answer

Buying a Call and selling a put strategy , gives reducing the market risk to the extent of the Difference of Call and put in this starargy the buyer or seller not require to own a underlying asset i.e Stock

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