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Lisa likes to buy puts on the stock XYZ. The stock is trading at $25.0...

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Finance

Lisa likes to buy puts on the stock XYZ. The stock is trading at $25.0 bid / 25.10 offered. The 1 - year XYZ $20 Put is offered at $2.00. (Assume that each option corresponds to one share of XYZ). Lisa wants to buy the put and hedge with stock, so as to be delta-neutral when the trade starts. What stock trade should she do? What would be her total cost for putting on the trade (stock plus option)? [Hint: compute the implied volatility of the put first.] Assuming that implied volatility remains the same, that the interest rate is zero, and that the stock pays no dividends.

What would be her profit/ loss in one year if XYZ price rose to $26?

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