Question

In: Finance

Suppose that put options on a stock with strike prices $30 and $35 cost $4 and...

Suppose that put options on a stock with strike prices $30 and $35 cost $4 and $7, respectively. How can the options be used to create (a) a bull spread and (b) a bear spread? For both spreads, show the profit functions for the intervals defined by the strike prices, and their graphical representation.

Solutions

Expert Solution

(a)

Bull spread is created by selling a $35 put and buying a $30 put.

Profit of a long put option = Max[X-S, 0] - P

Profit of a short put option = P - Max[0, X-S]

S = underlying price at expiry,

X = strike price

P = premium paid or received (long options involve paying premium, and short options receive premium)

(b)

Bear spread is created by buying a $35 put and selling a $30 put.

Profit of a long put option = Max[X-S, 0] - P

Profit of a short put option = P - Max[0, X-S]

S = underlying price at expiry,

X = strike price

P = premium paid or received (long options involve paying premium, and short options receive premium)

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Suppose that put options on a stock with strike prices $30 and $35 cost $4 and...
Suppose that put options on a stock with strike prices $30 and $35 cost $4 and $7, respectively. They both have 6-month maturity. (a) How can those two options be used to create a bear spread? (b) What is the initial investment? (c) Construct a table that shows the profits and payoffs for the bear spread when the stock price in 6 months is $28, $33 and $38, respectively. The table should look like this: Stock Price Payoff Profit $28...
Suppose that put options on a stock with strike prices $30 and $34 cost $4 and...
Suppose that put options on a stock with strike prices $30 and $34 cost $4 and $6, respectively. How can the options be used to create (a) a bull spread and (b) a bear spread? Construct a table that shows the profit and payoff for both spreads.
8. Suppose that put options on a stock with strike prices $33 and $40 cost $2...
8. Suppose that put options on a stock with strike prices $33 and $40 cost $2 and $5, respectively. a. How can the options be used to create (a) a bull spread and (b) a bear spread? • b. Is there a maximum profit or loss for each strategy? If so, what are they? c. What are the breakeven points? d. At what range of future stock prices will the spread make profit and loss.
Suppose that p1, p2, and p3 are the prices of European put options with strike prices...
Suppose that p1, p2, and p3 are the prices of European put options with strike prices K1, K2, and K3, respectively, where K3>K2>K1 and K3-K2=K2-K1. All options have the same maturity. Show that p2 <= 0.5(p1+p3) (Hint: Consider a portfolio that is long one option with strike price K1, long one option with strike price K3, and short two options with strike price K2.)
Suppose that call options on a stock with strike prices $120, $140 and $160 cost $13,...
Suppose that call options on a stock with strike prices $120, $140 and $160 cost $13, $14 and $18, respectively. How can the options be used to create a Butterfly spread? Call 1 – Strike $120: Position Long or short?__________ Call 2 – Strike $140: Position Long or short?__________ Call 3 – Strike $160: Position Long or short?__________                   I.            Explain how you can built the spread and write a table that shows the profit and payoff for each option and...
3. Suppose that call options on a stock with strike prices $40 and $45 cost $5...
3. Suppose that call options on a stock with strike prices $40 and $45 cost $5 and $4, respectively. They both have 10-month maturity. (a) How can those two call options be used to create a bull spread? (b) What is the initial investment? (c) Construct a table showing how payoff and profit varies with ST in 10 month, for the bull spread you created. The table should looks like this: Stock Price Payoff Profit ST < K1 K1 <...
Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. You...
Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. You plan to create a bull spread call (Buying a call spread) by trading a total of 200 options? Total amount of credit or debit: ____________________ (Credit or Debit?) Maximum amount of profit or loss: _______$300*200_____________ (Profit or Loss?) Break-even stock price of this spread: ____________________ NB: show complete workings
Nine-month put options with strike prices of $55 and $60 cost $4 and $7, respectively. What...
Nine-month put options with strike prices of $55 and $60 cost $4 and $7, respectively. What is the maximum gain when a bear spread is created by trading a total of 200 options? Select one: a. $100 b. $200 c. $300 d. $400
Consider six-month put options with strike prices of $35 and $40 per share and premiums of...
Consider six-month put options with strike prices of $35 and $40 per share and premiums of $4 and $6 per share, respectively. What is the maximum gain per share when a bear spread is created from the calls? What is the maximum loss per share when a bear spread is created from the calls?
Three put options on a stock have the same expiration date and strike prices of $70,...
Three put options on a stock have the same expiration date and strike prices of $70, $80, and $90 are available at prices of $5, $7, and $10, respectively. Explain how a butterfly spread can be created. Construct a table showing the profit from the strategy. For what range of stock prices would the butterfly spread lead to a loss? Input your Payoff Table and Draw your payoff diagram :
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT