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Trading Strategies using Options

Suppose that the price of a non-dividend-paying stock is $42, its volatility is 35%, and the risk-free rate for all maturities is 6% per annum. Use Derivagem (Analytic European) to calculate the cost of setting up the following positions. Assume Tree Steps = 100. In each case provide a spreadsheet showing the relationship between profit and final stock price. Use stock price ranges from $20 to $50. Your graphs should look similar to Figures 10.2 to 10.12.
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.

Solution Summary

Sets up bull spread using European call options, bear spread using European put options, butterfly spread using European call options, butterfly spread using European put options, straddle using options, strangle using options and shows the relationship between profit and final stock price for each of these positions.

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