Question

Exercise

After months of digging, interviewing dozens of government officials, and reviewing countless publicly available filings, your research team believes that the US Department of Transportation will be making an announcement on April 14^ththat it officially recognizes driverless cars 8x safer than standard cars. Your boss asks you to put together at least three unique alternatives for how your firm should trade call and/or put options based on this information. The current stock price and your firm’s projection of the future stock price (if the researchers are right) are below. The call and put tables (tables that show you the price of a call or a put based on the expiration and the strike price) are below for your reference as you develop your strategies. Be prepared to justify the trades that you propose to execute and discuss the pros and cons of the trades. I need help! Please explain!

Current Price:$557.00

Expected Price (if researchers are right):$570.00+

Call Table:

CALL TABLE	Expiration Date
Strike Price	4/6/15	4/13/15	4/20/15
$550	$11.50	$9.00	$15.00
$555	$6.70	$7.68	$12.40
$560	$3.70	$6.13	$7.00
$565	$1.80	$4.00	$6.20

Put Table:

PUT TABLE	Expiration Date
Strike Price	4/6/15	4/13/15	4/20/15
$550	$11.50	$11.00	$5.50
$555	$6.70	$7.68	$5.80
$560	$3.70	$6.13	$17.30
$565	$1.80	$4.00	$14.00

Answer 1

FOLLOWING ARE THE 3 OPTION STRATEGIES THAT COMPANY CAN FOLLOW
long straddle
	option	call	put
	long/short	long	long
4/20/15	strike	550	550
	premium	15	5.5
	spot	557
	CMP	LONG CALL	LONG PUT	NET FLOW
	549	-15	-4.5	-19.5
	550	-15	-5.5	-20.5
	551	-14	-5.5	-19.5
	552	-13	-5.5	-18.5
	553	-12	-5.5	-17.5
	554	-11	-5.5	-16.5
	555	-10	-5.5	-15.5
	556	-9	-5.5	-14.5
	557	-8	-5.5	-13.5
	558	-7	-5.5	-12.5
	559	-6	-5.5	-11.5
	560	-5	-5.5	-10.5
	561	-4	-5.5	-9.5
	562	-3	-5.5	-8.5
	563	-2	-5.5	-7.5
	564	-1	-5.5	-6.5
	565	0	-5.5	-5.5
	566	1	-5.5	-4.5
	567	2	-5.5	-3.5
	568	3	-5.5	-2.5
	569	4	-5.5	-1.5
	570	5	-5.5	-0.5
	571	6	-5.5	0.5
	572	7	-5.5	1.5
	573	8	-5.5	2.5
	574	9	-5.5	3.5
	575	10	-5.5	4.5
	576	11	-5.5	5.5
	577	12	-5.5	6.5
	578	13	-5.5	7.5
	579	14	-5.5	8.5
	580	15	-5.5	9.5
	581	16	-5.5	10.5
	582	17	-5.5	11.5
	583	18	-5.5	12.5
	584	19	-5.5	13.5
	585	20	-5.5	14.5
PROS
AS PRICE RISES PROFIT WILL RISE ; loss is limited to sum of premium paid
CONS
IF however PRICE does not move as desired company will incur loss
LONG STRANGLE
	option	call	put
	long/short	long	long
4/20/15	strike	560	550
	premium	7	5.5
	spot	557
	CMP	LONG CALL	LONG PUT	NET FLOW
	549	-7	-4.5	-11.5
	550	-7	-5.5	-12.5
	551	-7	-5.5	-12.5
	552	-7	-5.5	-12.5
	553	-7	-5.5	-12.5
	554	-7	-5.5	-12.5
	555	-7	-5.5	-12.5
	556	-7	-5.5	-12.5
	557	-7	-5.5	-12.5
	558	-7	-5.5	-12.5
	559	-7	-5.5	-12.5
	560	-7	-5.5	-12.5
	561	-6	-5.5	-11.5
	562	-5	-5.5	-10.5
	563	-4	-5.5	-9.5
	564	-3	-5.5	-8.5
	565	-2	-5.5	-7.5
	566	-1	-5.5	-6.5
	567	0	-5.5	-5.5
	568	1	-5.5	-4.5
	569	2	-5.5	-3.5
	570	3	-5.5	-2.5
	571	4	-5.5	-1.5
	572	5	-5.5	-0.5
	573	6	-5.5	0.5
	574	7	-5.5	1.5
	575	8	-5.5	2.5
	576	9	-5.5	3.5
	577	10	-5.5	4.5
	578	11	-5.5	5.5
	579	12	-5.5	6.5
	580	13	-5.5	7.5
	581	14	-5.5	8.5
	582	15	-5.5	9.5
	583	16	-5.5	10.5
	584	17	-5.5	11.5
	585	18	-5.5	12.5
PROS
AS PRICE RISES PROFIT WILL RISE ; loss is limited to premium paid
CONS
IF however PRICE does not move as desired company will incur loss , comparatively high breakeven point than long straddle
BULLISH VERTICAL SPREAD USING CALLS
	option	call	Call
	long/short	long	short
4/20/15	strike	550	565
	premium	15	6.2
	spot	557
	CMP	LONG CALL	short call	NET FLOW
	549	-15	6.2	-8.8
	550	-15	6.2	-8.8
	551	-14	6.2	-7.8
	552	-13	6.2	-6.8
	553	-12	6.2	-5.8
	554	-11	6.2	-4.8
	555	-10	6.2	-3.8
	556	-9	6.2	-2.8
	557	-8	6.2	-1.8
	558	-7	6.2	-0.8
	559	-6	6.2	0.2
	560	-5	6.2	1.2
	561	-4	6.2	2.2
	562	-3	6.2	3.2
	563	-2	6.2	4.2
	564	-1	6.2	5.2
	565	0	6.2	6.2
	566	1	5.2	6.2
	567	2	4.2	6.2
	568	3	3.2	6.2
	569	4	2.2	6.2
	570	5	1.2	6.2
	571	6	0.2	6.2
	572	7	-0.8	6.2
	573	8	-1.8	6.2
	574	9	-2.8	6.2
	575	10	-3.8	6.2
	576	11	-4.8	6.2
	577	12	-5.8	6.2
	578	13	-6.8	6.2
	579	14	-7.8	6.2
	580	15	-8.8	6.2
	581	16	-9.8	6.2
	582	17	-10.8	6.2
	583	18	-11.8	6.2
	584	19	-12.8	6.2
	585	20	-13.8	6.2
PROS
company starts to earn profit from a much lower point
LOSS amount is much lower if price remains where it is . i.e forecast goes wrong.
CONS
IF however PRICE does not move as desired company will incur loss
AS PRICE RISES PROFIT WILL NOT RISE i.e there is a capping on profit