Question

In: Finance

1. Consider the following options portfolio: You write a November 2017 expiration call option on stock...

1. Consider the following options portfolio:

You write a November 2017 expiration call option on stock Y with exercise price of $80. You also write a November 2017 put option on stock Y with exercise price of $75. Use the chart below to answer the following:

Graph the payoff of this portfolio at expiration as a function of the stock price at that time

What will be the profit/loss on this position if stock Y is selling at $77 on the option expiration date? What if it is selling at $83?

At what two stock prices will you just break even on the investment?

What kind of "bet" is the investor making; that is, what must this investor believe about the stock price in order to justify this position?

Options on Stock Y November 16th, 2017 shown here

Stock Y		Underlying stock price = $79.95
Expiration	Strike	Call	Put
Oct 2017	75	$3.95	$3.01
Oct 2017	80	$1.65	$5.72

Nov 2017	75	$4.85	$3.97
Nov 2017	80	$2.64	$6.74

2. A put option with strike price of $60 is trading exchange A and sells for $2. At the same time, a put on the same firm but with strike price of $62 also sells for $2. If you plan to hold the open positions until expiration, devise a zero-net-inevestment arbitrage strategy to exploit the pricing anomaly described above. Draw the profit diagram at expiration for your position ( you may hand draw and take a photo then upload)

3. You have a client who believes that the common stock price for Stock A (currently $58/share) could move substantially in either direction in reaction to an expected court decision involving the company. The client currently owns no Stock A shares, but asks you for your advice about implementing a strangle strategy to capitalize on the possible stock price movement. A strangle is a portfolio of a put and a call with different exercise prices but the same expiration date. You gather the following Stock A option price data:

Characteristic	Call Option	Put Option
Price	$5	$4
Strike price	$60	$55
Time to Exp.	90 days	90 days

Expert Solution

2. Zero investment strategy would be shorting PUT with strike price $60 and buying PUT with strike price $ 62

3. Strangle involves buying out-of-the-money call and put option. Stock is currently trading at $ 58

So, $60 call and $55 PUT are out-of-the-money options

jeff jeffy answered 2 years ago

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