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 helping on this. I do not understand this problem. Can someone simplify what you do with the expiration values and what the question above wants? Im not sure what the math on it involves either. I need the problem solved to have baby steps. Thanks!

Today as of 4/1

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

Since the researchers have a positive expectation about the stock on 14th april, we should be bullish and buy calls, but in case the information turns out to be fake, we need to remain hedged and we should also hold a position in the put.

After analysing the prices provided of the options, I would recommend to buy following options -

1. Call -$ 560 -20/4 - Price -$ 7 - Although the target price set by research team is $ 570 + , but tthis call looks fairly priced as compared to the call of $ 565. And since the announcement is on 14th April, there will not be much movement in the stock before 14th, so it would not be wise to buy any call expiring before 14th April

2. Put - $ 555 -$ 5.80 20/4 - In case the info is incorrect, there will be negative impact on the stock price which can pull it down below its current levels, and this put is just 0.30$ more expensive than put of $ 550, so it is a better choice.

So, Above strategy can be used to get some financial benefit of the upcoming event.