FISV6450-Derivatives-Case21.docx
FISV 6450 – Derivatives & Risk Management
Case #2 – Due October 23, 2017
Part 1:
After years of working his way up the ranks from an analyst, Gordon Gecko just received a promotion to portfolio manager. He has been assigned to manage a $25 million portfolio of U.S. Large Cap stocks that uses the S&P 500 Index as its benchmark. He has not worked on this portfolio as an analyst so it is the first time he has had a chance to begin reviewing the portfolio. It will take him some time to review the holdings and formulate his strategy. The U.S. election has caused a rally in the stocks and Gordon is concerned that the stock market valuations.
Below is the call and put options for SPY (an ETF that tracks the S&P 500 index). One option contract is equal to 100 shares. SPY is currently trading at $254.60. What issues is Gordon facing and what are the near-term risk? How can Gordon use options to help him as he manages his portfolio? In your recommendation, show the costs (premiums) and discuss break-even scenarios?
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Calls
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Open
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Implied
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Contract Name
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Last Trade
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Strike
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Last Price
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Bid
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Ask
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Change
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% Change
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Volume
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Interest
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Volatility
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SPY171215C00254000
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2017-10-11 11:00AM EDT
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254
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4.27
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4.26
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4.27
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0.03
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0.71%
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563
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14,570
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9.18%
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SPY171215C00255000
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2017-10-11 11:00AM EDT
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255
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3.61
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3.63
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3.64
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-0.04
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-1.10%
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1,846
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98,193
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8.87%
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SPY171215C00256000
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2017-10-11 11:00AM EDT
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256
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3.01
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3.01
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3.02
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0.01
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0.33%
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763
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59,393
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8.49%
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SPY171215C00257000
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2017-10-11 11:00AM EDT
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257
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2.48
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2.48
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2.49
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0.03
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1.22%
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1,264
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72,200
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8.20%
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SPY171215C00258000
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2017-10-11 11:00AM EDT
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258
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2
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2
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2.01
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-0.03
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-1.48%
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5,866
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23,361
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7.92%
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SPY171215C00259000
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2017-10-11 11:00AM EDT
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259
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1.59
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1.58
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1.59
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0
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-
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198
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22,889
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7.66%
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SPY171215C00260000
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2017-10-11 10:56AM EDT
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260
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1.25
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1.23
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1.25
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-0.02
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-1.57%
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5,307
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68,882
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7.47%
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SPY171215C00261000
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2017-10-11 10:33AM EDT
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261
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0.97
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0.95
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0.96
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-0.01
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-1.02%
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157
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18,366
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7.29%
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SPY171215C00262000
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2017-10-11 10:33AM EDT
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262
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0.75
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0.73
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0.74
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0.02
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2.74%
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67
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12,922
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7.18%
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SPY171215C00263000
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2017-10-11 10:00AM EDT
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263
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0.56
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0.56
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0.57
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-0.02
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-3.45%
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22
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28,845
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7.13%
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SPY171215C00264000
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2017-10-11 10:26AM EDT
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264
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0.45
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0.43
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0.44
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0
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-
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9
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8,004
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7.11%
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SPY171215C00265000
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2017-10-11 11:00AM EDT
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265
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0.34
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0.34
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0.35
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-0.01
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-2.86%
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10
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42,487
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7.17%
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Puts
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Open
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Implied
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Contract Name
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Last Trade
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Strike
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Last Price
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Bid
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Ask
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Change
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% Change
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Volume
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Interest
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Volatility
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SPY171215P00245000
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2017-10-11 11:00AM EDT
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245
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1.76
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1.76
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1.77
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0
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-
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74
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109,568
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12.34%
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SPY171215P00246000
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2017-10-11 11:00AM EDT
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246
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1.89
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1.88
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1.9
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0.02
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1.07%
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150
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10,365
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11.98%
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SPY171215P00247000
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2017-10-11 10:39AM EDT
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247
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2.03
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2.02
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2.04
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0.02
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1.00%
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89
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43,963
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11.61%
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SPY171215P00248000
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2017-10-11 11:00AM EDT
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248
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2.2
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2.2
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2.21
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0.02
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0.92%
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40
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26,548
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11.28%
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SPY171215P00249000
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2017-10-11 11:02AM EDT
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249
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2.38
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2.37
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2.38
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0.01
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0.42%
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159
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19,386
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10.90%
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SPY171215P00250000
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2017-10-11 11:00AM EDT
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250
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2.58
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2.58
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2.6
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0
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-
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78
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48,695
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10.60%
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SPY171215P00251000
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2017-10-11 11:00AM EDT
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251
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2.81
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2.81
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2.83
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-0.03
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-1.06%
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372
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11,061
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10.26%
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SPY171215P00252000
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2017-10-11 11:00AM EDT
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252
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3.08
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3.07
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3.09
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0.01
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0.33%
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626
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16,056
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9.93%
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SPY171215P00253000
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2017-10-11 11:00AM EDT
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253
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3.38
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3.38
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3.4
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0.03
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0.90%
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731
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5,889
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9.64%
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SPY171215P00254000
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2017-10-11 11:03AM EDT
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254
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3.76
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3.71
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3.73
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0.06
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1.62%
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2,268
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9,034
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9.33%
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SPY171215P00255000
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2017-10-11 10:58AM EDT
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255
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4.13
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4.11
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4.14
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0.01
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0.24%
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923
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11,957
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9.11%
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11.54%
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Part 2:
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Gordon just received a phone call from his parents and they informed him that his grandmother has passed away.
In her will, she has given Gordon 1,000 shares of Exxon Mobil stock (ticker = XOM). Since it is an inheritance, his cost basis is
stepped up to the date of death and equals $82.52. So he does not have to worry about paying taxes on any gains if he decides
to sell the stock immediately. However, his grandmother had held the stock for a long time and had hinted she would like
Gordon to hold on to it. What strategies can Gordon pursue with his Exxon shares? Below is some of the call and put options
quotes that are currently available. Discuss costs, risks, and gain/loss potential.
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%
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%
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9.66%
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9.50%
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9.34%
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