Lecture 7 - Lecture 7 More Option Strategies1 1 The...

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Lecture 7 More Option Strategies 1 1 The strategies come from CBOE.com
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Buy Calls on the Russell 2000 in Anticipation of “January Effect” Assume it is November and the Russell 2000 (RUT) Index, which is composed of small stocks, is priced at 480. You have done extensive research on the January Effect and believe that recent selling of stocks due to tax losses and holiday spending has created a bullish outlook for small stocks in upcoming weeks. You would like to participate in upside moves of small stocks but minimize your downside risk exposure. You also would like to avoid the transaction costs involved with buying and selling thousands of small stocks. Possible Strategy: Buy 30 January at-the money RUT call options priced at 20. Your total cost for the premium, with the $100 multiplier, is $60,000. (“At-the-money” means that the strike price is equal to the price of the underlying, so in this case the strike is 480.)
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Synthetic Stock XYZ is at $13.75. This stock is a relatively new listing, but is a strong competitor in its industry. You are expecting a 15% increase in the stock over the next six months as news of its industry position comes out. You want to establish a large (1,000 share) position over the short-term, but do not want to pay $13,750 capital cost at onset. You also want to keep as much upside as possible, and are willing to accept downside risk of stock. Possible strategy: Synthetic Stock. Buy 10 June 12.50 calls at 2.25. Sell 10 June 12.50 puts at 1.25. Debit of $1 x 10 contracts or $1,000. Stock Change XYZ @ expiration 12.50 call value (10 contracts) 12.50 put value (10 contracts) Position Value (10 contracts) Profit/(Loss) + 45.45% 20 $7,500.00 $0.00 $7,500.00 $6,500.00 + 16.36% 16 $3,500.00 $0.00 $3,500.00 $2,500.00 +/- 0.00% 13.75** $1,250.00 $0.00 $1,250.00 $250.00 -1.81% 13.50 *** $1,000.00 $0.00 $1,000.00 $0.00 - 27.27% 10.00 $0.00 $2,500.00 $2,500.00 $(3,500.00) - 100.00% 0**** $0.00 $12,500.00 $12,500.00 ($13,500.00)
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This note was uploaded on 02/06/2012 for the course MGMT 411 taught by Professor Clarke during the Spring '09 term at Purdue University.

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Lecture 7 - Lecture 7 More Option Strategies1 1 The...

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