Question

An asset manager wants to buy 100,000 apple shares at 2% discount below the current market price in about a month. She may submit a limit order and wait but may never be able to purchase at that price if apple does not go down by 2% or more. How can she take a more proactive options strategy to achieve her goal in the next month? please describe the option stratey and the outcome if in a month, apple price (a) oes up by 2%, (b) remains unchanged, or (c) goes down by 3%. please show yourcomputations

Answer 1

Number of shares to buy = 100,000

Discount = 2 percent

Assume the market price of one share of apple now is 100

The strategy that can be used to buy stocks at a discount is to : Sell Put options which is at-the-money with strike price as 100 . Selling a put option would give me an option premium.

Payoff when selling a put option = Option premium - max ( 0 , Strike - Spot price)

A) if the price goes up by 2% . The share price of Apple becomes 102 in a month , the put option that was sold becomes worthless and will have almost zero intrinsic value.

Profit for me = Option premium when selling a put - max (0,-2) = option premium

B) If the price remains unchanged . The Apple stock price remains at 100 after a month , the payoff would be same:

  Profit for me = Option premium when selling a put - max (0,0) = option premium

C) If the price goes down by 3 percent , if apple share becomes 97,

Profit for me = Option premium when selling a put - max (0,3) = Premium - (3 * 100,000) , but the advantage here is that the put option seller can buy the stock at strike price of 100.