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Option Strategies

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Answer questions 1 - 3 based on the information below. Assume r = 4% and no dividends.
Toyota Motor Corporation (TM) - Stock Price 77.70
Options expiring in one year
K Call Put
70 12.2 5.8
80 7.2 10.5
90 3.7 17.6

1) Consider a portfolio consisting of a long TM stock and a long put (K = $70).
a. Graph the profits to the position as a function of stock price.
b. How might you create a similar payoff structure using a call option? Based on a comparison of these two positions, are the options priced correctly?

2 Charles Schwab has been recommending a naked strangle to some clients. This is a short positioning both the $70 put and $80 call.
a. Draw a diagram showing profit as a function of stock price.
b. Compute maximum gain, loss and breakeven point(s).

3) Assume you own $1.5 million of Toyota stock in your retirement account and would like to protect your position. Toyota's beta is .66. Six-month S&P futures (250x the index) list for 1090. What position (long/short, number of contracts) would you take if you decided to hedge Toyota price risk with S&P forwards? How effective do you anticipate this strategy to be? Briefly explain.

Answer questions 4 - 7 based on the information below. Assume interest rates are 2% and no dividends.
Mylan Inc. (MYLAN) - Stock Price 17.42

Options Prices (6-months until expiration)
K Call Put
14 4 0.45
17 1.9 1.45
20 0.7 3.3

4 Graph the profits to the following position at expiration as a function of stock price. Compute the maximum profit, loss and breakeven points and show these distinctly in your excel file along with the formulas for computing each. A covered call (K = 20)
a) A long stock purchase.
b) A protective put (K = 17)
c) A covered call (K = 20)

5) Compute percentage gain or loss for each of the positions in #4 if the stock price in 6 months is $25. Repeat for a price of $10.

6) Graph the profits to a butterfly spread using the Mylan options. Compute break-even points.

7) Use the put and the call (K = 17) to create a synthetic forward. Graph the profit to this position.

** See ATTACHED file(s) for complete details **

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Solution Summary

Answers 7 questions on option strategies- long stock plus long put, short put plus short call, long stock, protective put, butterfly spread, synthetic forward

See Also This Related BrainMass Solution

Option strategies: straddle, butterfly spread, CONDOR, writing covered calls, writing puts, vertical bull spread

1. Suppose you buy 100 shares of ABC at $79.25 and simultaneously write a March 80 Straddle at the prices given below. Make a spreadsheet and draw a profit/loss diagram and label all significant points for this strategy.

March 80 call at $1.625
March 80 put at $3.50

2. XYZ Inc.'s JUN 300 calls ($4 1/4 each), JUN 305 calls ($2 1/2), and JUN 310 calls ($1) are all available to you. You are required to construct a butterfly spread and show (a) the maximum possible gain and (b) the maximum possible loss and the break-even point. What is the gain or loss if, at expiration, the underlying security sells for exactly $302?

3. Look at the situation in question 2 again. Now assume that you also have a JUN 315 call ($0.50) available to you. If you short a CONDOR using the calls-only strategy, what is (a) the maximum possible gain and (b) the maximum possible loss and the break-even point. What is the gain or loss if, at expiration, the underlying security sells for exactly $302?

4. Explain why writing covered calls and writing puts are generally equivalent strategies. Show with an example.

5. Using the following prices, answer the questions listed below.


JJ 25 3 4 1/4 5 1/2 2 2 1/2 3 3/4
27 1/2 30 1 1 7/8 2 1/2 3 1/8 3 3/4 4 5/8
27 1/2 35 1/8 3/4 1 1/4 7 1/2 8 8

a. Using MAY 30/35 construct a vertical bull spread using calls and puts.
b. Show the maximum profit/loss under both strategies.
c. Suppose at expiration the JJ stock sells for $33 1/4. What is the percentage return on your investment? Ignore transaction costs.

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