Question
In: Finance
Call options on a stock are available with strike prices of $15, $17.5, and $20 and...
Call options on a stock are available with strike prices of $15, $17.5, and $20 and expiration dates in 3-months. Their prices are $4, $2, and $0.5, respectively. An investor creates a portfolio by buying call options with strike prices of $15 and $20 and selling 2 call options with strike prices of $17.5.
a. Construct a table showing how profit varies with the stock price for this portfolio.
b. Plot the payoff diagram?
Solutions
Expert Solution
a)
Profit from Long Call option with Strike of $15 = max(Stock Price - Stirk Price, 0) - Call premium
Profit from Long Call option with Strike of $15 = max($13 - $15, 0) - $4
Profit from Long Call option with Strike of $15 = -$4
Profit from Long Call option with Strike of $20 = max(Stock Price - Stirk Price, 0) - Call premium
Profit from Long Call option with Strike of $20 = max($13 - $20, 0) - $0.5
Profit from Long Call option with Strike of $20 = -$0.5
Profit from 2 Short Call option with Strike of $17.5 = 2 * (- max(Stock Price - Stirk Price, 0) + Call premium)
Profit from 2 Short Call option with Strike of $17.5 = 2 * ( - max($13 - $17.5, 0) + $2)
Profit from 2 Short Call option with Strike of $17.5 = $4
| Stock Price | Profit from Long Call option with Strike = $15 | Profit from Long Call option with Strike = $20 | Profit from 2 Short Call option with Strike = $17.5 | Total Profit |
| $13.00 | -$4.00 | -$0.50 | $4.00 | -$0.50 |
| $13.50 | -$4.00 | -$0.50 | $4.00 | -$0.50 |
| $14.00 | -$4.00 | -$0.50 | $4.00 | -$0.50 |
| $14.50 | -$4.00 | -$0.50 | $4.00 | -$0.50 |
| $15.00 | -$4.00 | -$0.50 | $4.00 | -$0.50 |
| $15.50 | -$3.50 | -$0.50 | $4.00 | $0.00 |
| $16.00 | -$3.00 | -$0.50 | $4.00 | $0.50 |
| $16.50 | -$2.50 | -$0.50 | $4.00 | $1.00 |
| $17.00 | -$2.00 | -$0.50 | $4.00 | $1.50 |
| $17.50 | -$1.50 | -$0.50 | $4.00 | $2.00 |
| $18.00 | -$1.00 | -$0.50 | $3.00 | $1.50 |
| $18.50 | -$0.50 | -$0.50 | $2.00 | $1.00 |
| $19.00 | $0.00 | -$0.50 | $1.00 | $0.50 |
| $19.50 | $0.50 | -$0.50 | $0.00 | $0.00 |
| $20.00 | $1.00 | -$0.50 | -$1.00 | -$0.50 |
| $20.50 | $1.50 | $0.00 | -$2.00 | -$0.50 |
| $21.00 | $2.00 | $0.50 | -$3.00 | -$0.50 |
| $21.50 | $2.50 | $1.00 | -$4.00 | -$0.50 |
| $22.00 | $3.00 | $1.50 | -$5.00 | -$0.50 |
b)
| Stock Price | Payoff from Long Call option with Strike = $15 | Payoff from Long Call option with Strike = $20 | Payoff from 2 Short Call option with Strike = $17.5 | Total Payoff |
| $13.00 | $0.00 | $0.00 | $0.00 | $0.00 |
| $13.50 | $0.00 | $0.00 | $0.00 | $0.00 |
| $14.00 | $0.00 | $0.00 | $0.00 | $0.00 |
| $14.50 | $0.00 | $0.00 | $0.00 | $0.00 |
| $15.00 | $0.00 | $0.00 | $0.00 | $0.00 |
| $15.50 | $0.50 | $0.00 | $0.00 | $0.50 |
| $16.00 | $1.00 | $0.00 | $0.00 | $1.00 |
| $16.50 | $1.50 | $0.00 | $0.00 | $1.50 |
| $17.00 | $2.00 | $0.00 | $0.00 | $2.00 |
| $17.50 | $2.50 | $0.00 | $0.00 | $2.50 |
| $18.00 | $3.00 | $0.00 | -$1.00 | $2.00 |
| $18.50 | $3.50 | $0.00 | -$2.00 | $1.50 |
| $19.00 | $4.00 | $0.00 | -$3.00 | $1.00 |
| $19.50 | $4.50 | $0.00 | -$4.00 | $0.50 |
| $20.00 | $5.00 | $0.00 | -$5.00 | $0.00 |
| $20.50 | $5.50 | $0.50 | -$6.00 | $0.00 |
| $21.00 | $6.00 | $1.00 | -$7.00 | $0.00 |
| $21.50 | $6.50 | $1.50 | -$8.00 | $0.00 |
| $22.00 | $7.00 | $2.00 | -$9.00 | $0.00 |
jeff jeffy answered 1 year agoRelated Solutions
Call options on a stock TKM are available with strike prices of $13, $15, $17.5, $18.5...
Call options on a stock TKM are available with strike prices of
$13, $15, $17.5, $18.5 and $20 and expiration dates in three
months. Their prices are $5.5, $4, $2, $1.5 and $0.5 respectively.
Put options on the same stock are available with strike prices of
$24, $23.5, $22.5, $21 and $19 and expiration dates in three
months. Their prices are $5, $4, $2, $1.5 and $0.5 respectively.
TKM is currently trading at $19.40 and assuming the company is in...
Call options on a stock TKM are available with strike prices of $13, $15, $17.5, $18.5...
Call options on a stock TKM are available with strike prices of
$13, $15, $17.5, $18.5 and $20 and expiration dates in three
months. Their prices are $5.5, $4, $2, $1.5 and $0.5 respectively.
Put options on the same stock are available with strike prices of
$24, $23.5, $22.5, $21 and $19 and expiration dates in three
months. Their prices are $5, $4, $2, $1.5 and $0.5 respectively.
TKM is currently trading at $19.40 and assuming the company is in...
Call Option at a strike of 17.5, 20 and 22.5 have prices 5.47, 3.77 and 2.48,...
Call Option at a strike of 17.5, 20 and 22.5 have prices 5.47,
3.77 and 2.48, respectively. A Butterfly spread strategy has been
formulated. If underlying stock has a price of 22, net profit
(loss) will be ____________ while at stock price of 18.5,
profit/loss will be ______
The following prices are available for call and put options on a stock priced at $50....
The following prices are available for call and put options on a
stock priced at $50. The risk-free rate is 6 percent and the
volatility is 0.35. The March options have 90 days remaining and
the June options have 180 days remaining. The Black-Scholes model
was used to obtain the prices.
Calls
Puts
Strike
March
June
March
June
45
6.84
8.41
1.18
2.09
50
3.82
5.58
3.08
4.13
55
1.89
3.54
6.08
6.93
Suppose you closed the spread 60 days...
The following prices are available for call and put options on a stock priced at $50....
The following prices are available for call and put options on a
stock priced at $50. The risk-free rate is 6 percent and the
volatility is 0.35. The March options have 90 days remaining and
the June options have 180 days remaining. The Black-Scholes model
was used to obtain the prices.
Calls
Puts
Strike
March
June
March
June
45
6.84
8.41
1.18
2.09
50
3.82
5.58
3.08
4.13
55
1.89
3.54
6.08
6.93
long box spread using the June 50...
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 <...
The following options are available: 3-month European call with a strike price of $20 that is priced at $1.00
The following options are available:3-month European call with a strike price of $20 that is priced at $1.003-month European put with a strike price of $20 that is priced at $4.003-month call with a strike price of $25 that is priced at $8.503-month put with a strike price of $25 that is priced at $7.00Currently, the price of the underlying stock is $25.501)Identify all arbitrage trades, not considering interest.2)For each set of trades you will make, please describe the trades...
Stock XYZ is currently at $65. Consider two July call options with different strike prices, the...
Stock XYZ is currently at $65. Consider two July call options
with different strike prices, the July 60 call and the July 70
call. The price of one call option is $3 and the other is $7.
a. Based on the provided information, what is the price of July
60? What is your reasoning?
b. If a speculator has a view that the stock XYZ will increase
moderately, which option you will recommend her to buy? What is the
reasoning...
Six-month call options with strike prices of $20 and $26 cost $4 and $2, respectively. You...
Six-month call options with strike prices of $20 and $26 cost
$4 and $2, respectively. You plan to create a bull spread call
(Buying a call spread) by trading a total of 100 options. Answer
the following questions.?
Total amount of credit or debit:
Maximum amount of
loss:
Maximum amount of
profit:
Break-even stock price of this
spread:
Six-month put options with strike prices of $40 and $45 cost $3
and $5, respectively. You plan to create a bull spread...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- Java Program 1Use a loop to add up the odd numbers between 100 and 200. 2Use...
- Find the general solution using ONLY the variation of parameters method. (1+x)y'+2y=sinx/(1+x)
- In Java create a simple class named student with the following properties: id age gpa credit...
- parts a-c Coupon Bond Note: You need to use a financial calculator or Excel to solve...
- Does psychotherapy work & how might psychotherapy work?
- Write a program (polygon.py) that asks the user to enter the number of sides in a...
- 1) How many photons are emitted during a transition from a higher level orbit to a...
ADVERTISEMENT