Question

	Call Premiums		Put Premiums
Strike	Jan.	Feb.	Jan.	Feb.
105	7.50	7.75	.50	.60
110	6.25	6.50	.65	.75
115	1.15	1.20	3.25	3.62
120	.75	.95	8.10	8.85

Suppose that you decided to set up a short strip position using the Jan. 105 options. Find your profit/loss if the stock trades for $110 when the options expire. Round intermediate steps to four decimals and your final answer to two decimals. Do not use the dollar sign when entering your answer.

Suppose that you decided to set up a long strap position using the Feb. 110 options. Find your profit/loss if the stock trades for $127 when the options expire. Round intermediate steps to four decimals and your final answer to two decimals. Do not use the dollar sign when entering your answer.

A hedge fund manager believed that DEF stock would be relatively stable over her investment horizon and decided to use the Feb 120 options to create a straddle position based on her belief. If the stock trades for $127 when the options expire, what is her profit/loss?

• -90
• 90
• 280
• -280
• None of the above

Suppose that you decided to create a long strangle position using the 115 Feb call and the 110 Feb put when the stock price traded at $112. Find your profit/loss if the stock trades at $118 when the options expire.

• 105
• -105
• 605
• -605
• None of the above

Answer 1

Short strip position using the Jan. 105 options:

• Short (Sell) ONE Call Strike 105 at premium =7.50
• Short (Sell) TWO Puts Strike 105 at premium =0.5*2=1.00

Total Premium Received=7.50+1=8.50

Payoff for Short Call at Strike=105

Assume S=Stock Price at expiration

Payoff =Min.((105-S),0)

If S=110

Payoff =(105-110)=-5

Payoff for Short Put at Strike=105

Assume S=Stock Price at expiration

Payoff =Min.((S-105),0)

If S=110

Payoff =Min.((110-105),0)=0

Net Payoff=-5+2*0=-5

Net Profit/(Loss)=-5+8.50=3.50

Net Profit for short strip

3.50

Long strap position using the Feb. 110 options

• Long (Buy) ONE Put Strike 110 at premium =0.75
• Long(Buy) TWO Calls Strike 110 at premium =6.5*2=13.00

Total Premium Paid=13.00+0.75=13.75

Payoff for Long Put at Strike=110

Assume S=Stock Price at expiration

Payoff =Max.((110-S),0)

If S=127

Payoff =Max.((110-127),0)=0

Payoff for Long Call at Strike=110

Assume S=Stock Price at expiration

Payoff =Max.((S-110),0)

If S=127

Payoff =127-110=17

Net Payoff=0+2*17=34

Net Profit/(Loss)=34-13.75=20.25

Net Profit for Long Strap

20.25

Straddle position using the Feb. 120 options

• Long (Buy) ONE Put Strike 120 at premium =8.85
• Long(Buy) ONE Call Strike 120 at premium =0.95

Total Premium Paid=8.85+0.95=9.80

Payoff for Long Put at Strike=120

Assume S=Stock Price at expiration

Payoff =Max.((120-S),0)

If S=127

Payoff =Max.((120-127),0)=0

Payoff for Long Call at Strike=120

Assume S=Stock Price at expiration

Payoff =Max.((S-120),0)

If S=127

Payoff =127-120=7

Net Payoff=-0+7=7

Net Profit/(Loss)=7-9.8=(2.8)

Net Loss for Straddle

2.8

For One Contract ( 100 options) , Net Loss =100*2.8=280

ANSWER:

             -280

Long Strangle position using the Feb. 115 Call and Feb.110 Put options

• Long (Buy) ONE Put Strike 110 at premium =0.75
• Long(Buy) ONE Call Strike 115 at premium =1.20

Total Premium Paid=0.75+1.20=1.95

Payoff for Long Put at Strike=110

Assume S=Stock Price at expiration

Payoff =Max.((110-S),0)

If S=118

Payoff =Max.((110-118),0)=0

Payoff for Long Call at Strike=115

Assume S=Stock Price at expiration

Payoff =Max.((S-115),0)

If S=118

Payoff =118-115=3

Net Payoff=-0+3=3

Net Profit/(Loss)=3-1.95=1.05

Net Profit for Strangle

1.05

For One Contract ( 100 options) , Net Profit =100*1.05=105

ANSWER:

105