Option Payoffs. Suppose that you wish to make a bet on Alibaba (BABA) as follows. You will (a) buy two March 15 calls struck at K = $65 at $10.62 per call. (b) short two March 15 calls struck at K $70 at $6.95 per call, and = and (c) short two March 15 calls struck at K $80 at $2.31 per call, = (d) buy two March 15 calls struck at K = $85 at $1.17 per call. The current price of BABA is $74.63. For the purpose of this problem, assume the calls are European (in fact, standard single name options are American) and assume you can buy a call on one share (in fact, call options contracts are options on 100 shares.) (a) Find the price of this option strategy on a per share basis. Put differently, how much capital at t = 0 do you need to buy this portfolio if we ignore any margin requirements. Note: when you short the calls, you receive the premium upfront - this is equivalent to a negative price. Be careful to get all of the signs correct! Solution:

Option Payoffs. Suppose that you wish to make a bet on Alibaba (BABA) as follows. You will (a) buy two March 15 calls struck at K = $65 at $10.62 per call. (b) short two March 15 calls struck at K $70 at $6.95 per call, and = and (c) short two March 15 calls struck at K $80 at $2.31 per call, = (d) buy two March 15 calls struck at K = $85 at $1.17 per call. The current price of BABA is $74.63. For the purpose of this problem, assume the calls are European (in fact, standard single name options are American) and assume you can buy a call on one share (in fact, call options contracts are options on 100 shares.) (a) Find the price of this option strategy on a per share basis. Put differently, how much capital at t = 0 do you need to buy this portfolio if we ignore any margin requirements. Note: when you short the calls, you receive the premium upfront - this is equivalent to a negative price. Be careful to get all of the signs correct! Solution:

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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1. An investeor buys a ratio spread of 1-year European calls. He buys 1 call option with strike price 40 and sell 2 call options with strike price 50. Option prices are (Strike price, Call option premium) = (40, 10), (50, 5) (a) Draw its profit plot. Formulas and explains regarding your plot are required. (b) 45, 55, 65. Determine the investor's profit if the end price of the underlying stock is
a) Plot the payoff and profit of the following options based strategy: Buy 3 puts with strike 100, sell 4 puts with strike 110 and buy 1 put with strike 140. Explain all your calculations. b) If the price of the put with strike 100 is $8 and the price of the put with strike 140 is $16, what can you say about the price of the put with strike 110? Explain
The investor Y decides to: Buy a call option for $5 with $200 as strike price Sell a put option for $10 with $100 as strike price a)Calculate the result of the investor if the market price is $60 b)Calculate the result of the investor if the market price is $260 c)Represent the results of the investor for both cases a) and b) in the same figure
A call option with a strike price of $50 costs $2. A put option with a strike price of $45 costs $3. Construct the profit table and graph from buying these two together. This strategy is called Strangle. Explain why would an investor invest in a Strangle.
Suppose you combine two option contracts as follows. You buy a call option on a stock with an exercise price of $65 for a premium of 9$. At the same time you sell a call option on the same stock with an exercise price of $75 for a premium of $4. Both calls expire at the same time. The stock sells currently at $72. Answer the following questions about this investment strategy: 1. Determinethevalueatexpiration(thepayoffs)andtheprofitunderthefollowingoutcomes: a. The price of the stock at expiration is $78b. The price of the stock at expiration is $69c. Thepriceofthestockatexpirationis$62 2. Determine the following:a. The maximum profit b. The maximum loss 3. Determinethebreakevenstockpriceatexpiration(thestockpriceforwhichyourstrategydeliversno profit and no loss). 4. Depictthepayoffandprofitdiagramsofyourinvestmentstrategy.
Options2. Construct profit diagrams at expiration time to show what position in META puts, calls and/or underlying stock best expresses the investor’s objectives described below. META currently sells for $210 so that profit diagrams between $150 and $250 in $10 increments are appropriate. Assume that at-the-money puts and calls currently cost$30 each. The call with strike $190 costs $40 and the call with strike $230 costs $20. (a) An investor wants to benefit from META price drops but does not want to lose more than $30 on the investment. (b) An investor wants to have a positive payoff if the upcoming META earnings announcement is close to market expectations—meaning that the price will not move by more than $20 dollars.
Graph the profits and losses associated with writing a call option on a security with a strike price of $60 and a premium of $5. A) Suppose that you own 100 shares of the company in which you wrote the option in this question. If you purchase these shares at $50 what will your net profit/loss position look like. Now over, say share prices from $40 to $80? Construct a table and graph the situation.
show this on a diagram please. An investor makes the following three investments: (i) the purchase of a stock for £38(ii) the purchase of a put option for £0.50 with a strike price of £35 and (iii) the sale ofa call option (ie. writing a call option) for £0.50 with a strike price of £40 . What is the maximum profit and loss for this position?
A call option with a strike price of $50 costs $2. A put option with a strike price of $45 costs $3. Explain how a strangle can be created from these two options. What is the pattern of profits?
Answer the next 4 questions using the information in the following table. You are considering the purchase of a $1,000 par value Treasury Bill and observe the following quotes for T-Bills in the market: Ignore transaction costs. Time to Maturity (days) Bid Asked % % 60 1.64 1.55 88 1.63 1.54 116 1.62 1.53 144 1.61 1.52 4. The bid price of a T-bill in the secondary market is A. the price at which the dealer in T-bills is willing to sell the bill. B. the price at which the investor in T-bills is willing to sell the bill. C. larger than the ask price of the T-bill. D. The price at which the investor can buy the T-bill. 5. What is the purchase price of the 144-day bill that you face? А. $993.29 B. $993.56 С. $993.92 D. $994.05
A trader buys a call option with a strike price of $45 and a put option with a strike price of $40. Both options have the same maturity. The call costs $4 and the put costs $5. Draw a diagram showing the variation of the trader’s profit with the asset price.
Consider a call option with an exercise of $20 and which sells for $1.25. Draw the profit diagram for a long position in this option at option expiration. Be sure to label the maximum profit, maximum loss and break-even.

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