A client believes that XYZZY stock has topped out in price and is ready for a steep drop. What recommendation would give the customer the smallest profit if this occurs

Answers

Answer 1

Answer: Buy XYZZ stock and sell an XYZZ call

Explanation:

Since the buyer seems convinced that XYZZ stock has bottomed its price, he should purchase the stock since it has gotten to its cheapest Point.

And since he believes that XYZZ's price would rebound soon, He should exercise a little patience and not sell at a call option for XYZZ. Because if he attempts to sell at a call option then his earnings becomes very limited, since the price set at the call option would be very low.

My best advice would be for him to hold on to XYZZ stock for a while and allow for its price to rebound.


Related Questions

An investor buys a 10-year, 7% coupon bond for $1,050, holds it for 1 year, and then sells it for $1,040. What was the investor's rate of return?

Answers

Answer:

The answer is 5.71%

Explanation:

Solution

Given that

Coupon rate = 7%

Bond = $1050

Sale of the bond = $1040

n = 10 years, n = 1 year

Now we find the investor's rate of return

Thus

Coupon payment = 7%* 1000

=70

1050 = 70/(1+r) + $1,040/(1+r)

r= 5.71%

Therefore the rate of return of the investor is 5.71%

or

Rate of return = (P1-P0+ Interest ) /P0

= (1040 -1050 + 70 )/1050

= .0571 or 5.71%

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