(b) Draw the payoff of the portfolio as a function of BABA's price on T=March 15, ST. Solution: payoffT 15 10 5 0 50 55 60 65 70 | 75 ST 80 85 90 95 100 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 (c) short two March 15 calls struck at K = $80 at $2.31 per call, and (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.)

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:

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

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.