Day trading An option to buy a stock is priced at $200.If the stock closes above 30 on May 15, the option willbe worth $1000. If it closes below 20, the option will be worth nothing, and if it closes between 20 and 30 (inclu-sively), the option will be worth $200. A trader thinks there is a 50% chance that the stock will close in the20–30 range, a 20% chance that it will close above 30,and a 30% chance that it will fall below 20 on May 15.a) Should she buy the stock option?b) How much does she expect to gain?c) What is the standard deviation of her gain?

Day trading An option to buy a stock is priced at $200.If the stock closes above 30 on May 15, the option willbe worth $1000. If it closes below 20, the option will be worth nothing, and if it closes between 20 and 30 (inclu-sively), the option will be worth $200. A trader thinks there is a 50% chance that the stock will close in the20–30 range, a 20% chance that it will close above 30,and a 30% chance that it will fall below 20 on May 15.a) Should she buy the stock option?b) How much does she expect to gain?c) What is the standard deviation of her gain?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter5: Financial Options

Section: Chapter Questions

Problem 4MC

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