e Covid-19 Pandemic has disrupted the performance of many business entities. Depending on the core business activity of a company, the continuity of its business is highly uncertain. This case highlights two companies in Malaysia that falls in this uncertain circumstance. First is the AB-Travel Corporation, which operates a fleet of inbound and outbound tours, hotels, restaurants and entertainment outlets. Second is the Mega-Medic Corporation, which produces surgical rubber gloves, face masks and deals with various medical equipment. Generally, the market sentiments for listed company shares has been bearish since the Covid-19 pandemic control orders were implemented in Malaysia in March 2020. However, the businesses that involved predominantly in healthcare have achieved uptrend movements in its stock prices while the businesses that involved in tour and entertainment has its stock prices dipped. AB-Travel Corporation’s shares are currently trading at RM3.5
The Covid-19 Pandemic has disrupted the performance of many business entities. Depending on the core business activity of a company, the continuity of its business is highly uncertain. This case highlights two companies in Malaysia that falls in this uncertain circumstance. First is the AB-Travel Corporation, which operates a fleet of inbound and outbound tours, hotels, restaurants and entertainment outlets. Second is the Mega-Medic Corporation, which produces surgical rubber gloves, face masks and deals with various medical equipment.
Generally, the market sentiments for listed company shares has been bearish since the Covid-19 pandemic control orders were implemented in Malaysia in March 2020. However, the businesses that involved predominantly in healthcare have achieved uptrend movements in its stock prices while the businesses that involved in tour and entertainment has its stock prices dipped.
AB-Travel Corporation’s shares are currently trading at RM3.50 per share while Mega-Medic Corporation shares are trading at RM9.00 per share. AB-Travel Corporation’s share prices had recorded a 15% drop in the last 4 weeks and had dropped about 60% since last year. Mega-Medic Corporation’s shares has recorded a 20% increase in the last 4 weeks and has appreciated by about 450% since last year.
Assuming that you represent a financial institution that can trade options contracts and you have gathered information on both these firms. Based on the April 2021 European Options trading data on both these firms (which will expire on 30th April 2021), you are required to strategize the best options trading which can provide profit at lowest possible cost.
April 2021 Option Prices: AB-Travel Corp. April 2021 Option Prices: Mega-Medic Corp.
|
Strike Price (RM) |
Call Price (RM) |
Put Price (RM) |
|
Strike Price (RM) |
Call Price (RM) |
Put Price (RM) |
|
3.00 |
0.25 |
0.45 |
|
8.50 |
0.98 |
0.33 |
|
3.25 |
0.22 |
0.55 |
|
8.75 |
0.90 |
0.45 |
|
3.50 |
0.18 |
0.65 |
|
9.00 |
0.75 |
0.55 |
|
3.75 |
0.15 |
0.90 |
|
9.25 |
0.65 |
0.70 |
|
4.00 |
0.12 |
1.05 |
|
9.50 |
0.55 |
0.85 |
|
4.25 |
0.10 |
1.12 |
|
9.75 |
0.50 |
0.90 |
|
4.50 |
0.08 |
1.25 |
|
10.00 |
0.45 |
1.02 |
Based on the current market conditions and the option prices in the tables above, you are required to:
- Design the appropriate vertical option spreads strategy for each firm that could limit the cost and cap a reasonable profit.
- Show the appropriate spread diagrams supported by its payoff tables.
- Provide a brief explanation on how your spread strategies in part (a) can be profitable.
Step by step
Solved in 2 steps with 2 images
