Amazon’s stock.

You own 100 stocks of Amazon’s stock. The current stock price is $3,120. You believe that the
stock price will double in two years, but you have a strong feeling that the stock price will drop in the next
six months due to the current economic conditions, you are not worried about this drop because you believe
it is temporary. Therefore, based on your expectations, you want to benefit from the stock price movement
by writing options without giving up your stock. The options available in the CBOE are as follows:
Option Type Strike Price Maturity
Call $3,080 3 Months
Call $3,100 3 Months
Call $3,120 3 Months
Put $3,080 3 Months
Put $3,100 3 Months
Put $3,120 3 Months
i) What is the name of the strategy you will create that includes both the stocks you own and the
options you will write? Which option will you choose and why?
2
ii) The price of a call option on Amazon’s stock that expires in 9 months with a strike price of
$3,080 is $400. If the 9-month Treasury bill is 1.315% (APR rate), what is the implied
volatility?
iii) Using the implied volatility in the previous question, and based on the Black-Scholes-Merton
model, what is the expected revenue from the strategy you chose in part (i)?

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