Question

For questions 15-17: Intel Corp. (US ticker: INTC) is expected to release its Q2 earnings on July 23. INTC is currently trading at $57.50. Premia on the August $55, $57.50 and $60 INTC call options are currently $7.00, $4.50, and $3.00, respectively. And on the August $55, $57.50 and $60 INTC put options, premia are currently $3.50, $5.00, and $7.00, respectively.

15. Based on your fundamental analysis, INTC should moderately beat Q2 consensus EPS expectations. The best option strategy to maximize profit from your INTC view is:

A)$55 – $60 bull call spread

B) A $55 – $57.50 bull call spread

C) A $55 – $57.50 bull put spread

D) A $57.50 – $60 bull call spread

E) A $57.50 – $60 bull put spread

16. An analyst you follow and trust has issued a sell recommendation for INTC on a weak Q2 EPS forecast. The best option strategy you to maximize profit from his INTC view is:

A) A $60 – $55 bear call spread

B) A $57.50 – $55 bear put spread

C) A $57.50 – $55 bear call spread

D) A $60 – $57.50 bear put spread

E) A $60 – $57.50 bear call spread

17. Your quantitative model is pointing to heightened INTC stock price volatility around the Q2 earnings announcement but cannot determine the stock price’s post-earnings direction. The best option strategy to profit from your model’s output on INTC with minimal exposure is:

A) $57.50 straddle

B) A $55 – $60 strangle

C) A $57.50 – $60 strangle

D) A $55 – $57.50 strangle

E) A $60 straddle

Answer 1

15. The current stock price if $57.5. Hence, we speculate that this stock price after the news should be above $57.5. Hence, we go for a $55 – $57.50 bull strategy as profit will be maximised above $57.5. Both put and call bull spread has the same payoff. Hence, we implement a strategy which has lesser initial investment. Since, the forecast signifies moderate upside, we take up the bull put spread since the bull put spread is lower reward but has a higher probability to actually succeed.. In this, we long put option at lower strike price and short a put option with a higher strike price. Hence,  C) A $55 – $57.50 bull put spread

16. The current stock price if $57.5. Hence, we speculate that this stock price after the news should be lower than $57.5. Hence, we go for a $55 – $57.50 bear strategy as profit will be maximised below $57.5. Both put and call bear spread has the same directional payoff, but bear put strategy isa high reward, high initial investement strategy. Since, the forecase is a clear sell, we implement the bear put spread. Hence,  C) A $57.50 – $55 bear put spread

17. Since we need a strategy with minimal exposure, we select a strangle. A strangle is created by buying a call option with higher strike price and buying a put option with lower strike price. The investor will profit if the stock price ends up outside these 2 strike prices. Clearly we cannot determine the stock price’s post-earnings direction. Hence, the current stock price should be considered as a mid-point between the 2 strike prices involved in a strangle. Hence, B) A $55 – $60 strangle