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.
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Answers 7 questions on option strategies- long stock plus long put, short put plus short call, long stock, protective put, butterfly spread, synthetic forward
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.
EP FEB MAY AUG FEB MAY AUG
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.