A trader buys a put option with strike $85 and buys a call option with a strike of $95, both with the same maturity T, with 2 months to expiration. The call option trades at $4 and the put option trades at $4.50. The current share price is $90. If the trader holds this position until the expiration date, what are the "breakeven share prices"? What is the "maximum gain" and the "maximum loss" that the trader could make on this trade? In which scenarios would the trader make the maximum gain and the maximum loss? This position is a type of "option combination", what is this type of combination called? Is the trader's overall position long or short volatility? Explain how volatility skew would affect this trading strategy.

A trader buys a put option with strike $85 and buys a call option with a strike of $95, both with the same maturity T, with 2 months to expiration. The call option trades at $4 and the put option trades at $4.50. The current share price is $90. If the trader holds this position until the expiration date, what are the "breakeven share prices"? What is the "maximum gain" and the "maximum loss" that the trader could make on this trade? In which scenarios would the trader make the maximum gain and the maximum loss? This position is a type of "option combination", what is this type of combination called? Is the trader's overall position long or short volatility? Explain how volatility skew would affect this trading strategy.

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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Consider a put option whose underlying asset is a stock index with 6 months to expiration and a strike price of $1000. Suppose the risk-free interest rate for the six months is 2% and that the option’s premium is $74.20. (a) Find the future premium value in six months. (b) What is the buyer’s profit is the index spot price is $1100? (c) What is the buyer’s profit is the index spot price is $900 Only typed answer
A one-year call option on a stock with strike price of $90 costs $6 and a one-year put option on the same stock with strike price of $90 costs $7. Suppose that a trader buys one call option and one put option. a. What is the breakeven stock price, above which the trader makes a profit? b. What is the breakeven stock price, below which the trader makes a profit?
A trader buys a call option on a share for K2. The stock price is K25 and the strike price is K20. State the circumstances under which the trader will make a profit. State the circumstances under which the option will be exercised. Draw a diagram in support of your answers above, showing the variation of the trader’s profit with the stock price at the maturity of the option.
Suppose that a June call option to buy a share for $65 costs $3.5 and is held until June. Under what circumstances will the holder of the option make profit Under what circumstances will the option be exercised? Draw a diagram showing how the profit on a long position in the option depends on the stock price at the maturity of the option.
Suppose that a trader buys two call options and one put option. A one-year call| option on a stock with a strike price of $36 costs $1.90. A one-year put option on the stock with a strike price of $36 costs $1.68. What is the breakeven stock price rounded to the nearest cents , below which the trader makes a profit? Round your final result to the nearest cents and input one number only, without units or percentage sign [%], using the dot [.] to separate decimals. Your Answer: Answer
A call option on the stock of Bedrock Boulders has a market price of $7.The stock sells for $30 a share, and the option has a strike price of $25 ashare. What is the exercise value of the call option? What is the option’stime value?
3. A trader buys (long) a call option with a strike price of $110 and sells (short) a put option with a strike price of $100. Both options have the same maturity. The call costs $20 and the price of put is $10. What is the portfolio payoff at expiry if the security price at expiry is $70? Draw a diagram showing the variation of the trader’s profit with the security price at expiry.
Using the binomial call option model to find the current value of a call option with a $25 exercise price on a stock currently priced at $26. Assume the option expires at the end of two periods, the riskless interest rate is ½ percent per period. What are the hedge ratios?
Compute the Black-Scholes price of a call option on a stock which does not pay dividends and has the volatility 0.2, if its exercise price is 200 USD and expiration in one year. Interest rate is zero and the price of the stock is 180 USD. Use excel and share the formula template.
Suppose that the current price of Roblox Corporation common stock is (RBLX) is $100. If the price of RBLX will be either $150 or $50 one year from now, what is the price of a call option with a strike price of $120 expiring one year from now? Assume that the current risk free rate is 1%. What is the risk neutral probability of the stock being $150 one year from now?
Assume that you hold a call option on stock A. The call has a strike price of 50 and expires in 6 months. Stock A pays no dividends. 1. What is the payoff from the call if stock A is trading at 57 in 6 months? 2. What is the payoff from the call if stock A is trading at 45 in 6 months? 3. Draw a payoff diagram that shows the payoff of the call as a function of the underlying stock price.
An option is trading at $3.45. If it has a delta of .78, what would the price of the option be if the underlying increases by $.75? A. What would the price of the option be if the underlying decreases by $.55? B. What makes this a call option? C. With a delta of .78, is this option ITM, ATM or OTM and how?

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