Trading strategies involving options
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Suppose that the price of a non-dividend paying stock is $32, its volatility is 30%, and the risk-free rate for all maturities is 5% per annum. Use derivagem to calculate the costs of setting up the following positions. In each case provide a table showing the relationship between the profit and final stock price. Ignore the impact of discounting.
a) A bull spread using European call options with strike prices of $25 and $30 and a maturity of 6 months
b) A bear spread using European put options with strike prices of $25 and $30 and a maturity of 6 months
c) A butterfly spread using European call options with strike prices of $25, $30 and $35 and a maturity of 1 year
d" A butterfly spread using european put options with strike prices of $25, $30 and $35 and a maturity of one year-
e) A straddle using options with a strike price of $30 and a 6-month maturity
e) A strangle using options with a strike prices of $25 and $35 and a 6-month maturity
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Solution Summary
The solution provides a table showing the relationship between the profit and final stock price for the following: 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.
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