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Trading Strategies Involving Options

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AD 10: Suppose that the price of a non-dividend-paying stock is $38, its volatility is 35%, and the risk-free rate for all maturities is 4% per annum. Use Derivagem (Analytic European) to calculate the cost of setting up the following positions. In each case provide a spreadsheet showing the relationship between profit and final stock price. Hint: use the strategy developed for AD 8 from Hull Chapter 8.

Q1: A bull spread using European call options with strike prices of $35 and $40 and an expiration of 6 months.

Q2: A bear spread using European put options with strike prices of $35 and $40 and an expiration of 6 months.

Q3: A butterfly spread using European call options with strike prices of $35, $40 and $45 and an expiration of one year.

Q4: A butterfly spread using European put options with strike prices of $35, $40 and $45 and an expiration of one year.

Q5: A straddle using options with a strike price of $35 and a six-month expiration.

Q6: A strangle using options with a strike prices of $35 and $40 and a six-month expiration.

Adapted from Fundamentals of Futures and Options Markets, 6th ed., John C. Hull.

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Solution Summary

Creates bull spread, bear spread, butterfly spread, straddle, strangle using European call and put options.

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