Consider the following combination strategy: Long in a December $115 call, premium = $8 and long...

Consider the following combination strategy: Long in a December $115 call, premium = $8 and long in a December $115 put, premium = $4.25.

What type of strategy is this and what type of price expectations does it suggest?
Evaluate the payoff at maturity for 100 share contracts if the prices are $100 and $125 per share.
Diagram the payoff profile for the strategy. Label the break-even prices (including premia).

Expert Solution

a) Buying a call and buying a put is a long straddle strategy. It is a strategy where we expect the price to be volatile. If the price moves beyond the band on either side, we make profit.

b) Payoffs

Call payoff = (Spot Price - Strike Price ) (Where S>X) or Zero (Where S<X)

Put Payoffs = (Strike Price - Spot Price) (Where S<X) or Zero (Where S>X)

c) Payoff Profile of the strategy

We find the net profit using various strike price

Break-even Price = Strike Price +/- ( Total Premium)

= 115 + 12.25 or 115 - 12.25

= 127.25 or 102.75

jeff jeffy answered 2 years ago

Short a call at 115, long a put at 115, and long one share of the...

Short a call at 115, long a put at 115, and long one share of the stock. (Please include a table with at least 50 data points for the graph. Graph the value of your portfolio as a function of the relevant stock price. Graph for stock prices between 100 and 140.)

Consider the following strategy: Long in April $110 put, premium = $2.50 and long in April...

Consider the following strategy: Long in April $110 put, premium = $2.50 and long in April $115 call, premium = $2.75. What type of strategy is this and what price expectations does it suggest? Is it similar to any other combination strategy? Evaluate the payoff for 100 share contracts if the prices at maturity are $95 and $130. Diagram the payoff profile for the strategy. Label the break-even prices (including premia).

Consider a call option with a premium of $8 for which the exercise price is $50....

Consider a call option with a premium of $8 for which the exercise price is $50. What is the profit for a holder if the underlying stock price at expiration is $60.00? What is the profit for the seller?

Consider the following option strategy: • Long one call with $100 strike price, bought for $11...

Consider the following option strategy: • Long one call with $100 strike price, bought for $11 • Long one call with $90 strike price, bought for $20 • Short one call with $105 strike price, sold for $8 • Short one call with $95 strike price, sold for $16 1. Draw a picture of the payoff of the option strategy at expiration as a function of the stock price. 2. Draw a picture of the investor’s profit as a function...

Q) Consider the following spread strategy: Short John Deere June $150 call, price = $13.50, long...

Q) Consider the following spread strategy: Short John Deere June $150 call, price = $13.50, long John Deere July $150 call at price = $18.625. a. What type of spread strategy is this? b. In June at expiration of the short call, Deere is currently trading at $152 and the July call is trading at $19.50. We close our spread position in two ways: settle on the June $150 call and take an offsetting position on the July $150 call....

Consider the following “portfolio:” buy a call at the premium Vc and buy a Treasury bill...

Consider the following “portfolio:” buy a call at the premium Vc and buy a Treasury bill having price-per-face of ? and face of E, where E is the exercise price of the option. Now show how you would “short” this portfolio. What is the payoff pattern? Explain.

Graph the profit/loss for the following options positions. Long at-the-money call with strike 40 and premium...

Graph the profit/loss for the following options positions. Long at-the-money call with strike 40 and premium 2; Short at-the-money put with strike 40 and premium 2 Combination of the long call and short put, both with strike=40 and premium=2 Long straddle: buy call and put both with strike 40 and premium 3 Short straddle: sell call and put, both with strike 40 and premium 3

Short a call option with a strike price of $1.25 and a premium of $0.12. Long...

Short a call option with a strike price of $1.25 and a premium of $0.12. Long a call option with a strike price of $1.35 and a premium of $0.02. Short a put option with a strike price of 41.35 and a premium of $0.03. a. Draw the final contigency graph(include break even, max loss, max gain) b. Compare your final graph with one of the three original graphs(from the question). Tell me if you see an opportunity to make...

ABC stock is being traded at $115 today. Consider European put and call options with an...

ABC stock is being traded at $115 today. Consider European put and call options with an exercise price of $110. The option expires in 91 days and the volatility is 0.50. The risk-free rate (continuously compounded) is 2.5%. Use actual/365 day count method. A) Calculate the values of the put and call options. Assume there will be no dividend before the option expires. B) Calculate the values of the put and call options, but assume now the continously compounded dividend...

Replacing the strategy of risk free cashflow. Why not long shares, long put and short call?...

Replacing the strategy of risk free cashflow. Why not long shares, long put and short call? Again, how to decide what strategy to use?

Question