View the step-by-step solution to:

Question

A stock is trading at a price of $24.67. You also have the following information on the prices of options that

trade on this stock, where all options expire in 6 months.


Strike Call Put

20.00 5.15 0.17

22.50 3.18 0.66

25.00 1.73 1.67

27.50 0.83 3.24

30.00 0.36 5.22


Consider the following trading strategies:

-Buy a call option with a strike of 25 and short a put with a strike of 25

-Buy a call option with a strike of 25 and write-a call with a strike of 27.50

-Buy a put option with a strike of 20, buy a put option with a strike of 30, write-a put with a strike of 22.5 and write-a put with a strike of 27.50


Let ST represent the value of the underlying asset at expiration.


(a) Plot the payos, or construct the payo table, of each of the three strategies as a function of ST


(b) For what values of ST does each trading strategy yield a positive payo? Give the range of values for each of the strategies. For what range do the trading strategies yield a positive prot (taking into account the cost of the position)? For the purposes of answering this question, you may ignore the opportunity cost of funds.


(c) Which of the strategies would you call bullish? Which would you call bearish? Which would be a low volatility trade?

Top Answer

a. The pay-off table is given in the explanation part. b. In trading strategy one: The lowest current market price (CMP)... View the full answer

strategy 1.PNG

Sign up to view the full answer

Other Answers

a) Find the attached screenshot b) Strategy 1: ST>25 Strategy 2:ST>25 Strategy 3: ST>20 Taking... View the full answer

Screenshot 2020-01-02 at 11.36.04 PM.png

ST
Strategy 1
Strategy 2
Return
Premium
Total
Strategy 3
Return
Premium
Call Value
Total
Return
Premium
Total
Put Value
20
-5
0.06
5.06
25
27.5
20
22.5
-0.9
25
0.90
0.00
27.5
30
20.5
1.49
1.49...

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question