Option
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OptionTradingAssignment.docxOption Trading Assignment
. As soon as possible choose a company. Make sure that you choose a company for which a large number of options are traded and in particular, there are MULTIPLE options with an October 20, 2017 maturity. You may not choose a company that does not have MULTIPLE options traded with an October 20, 2017 maturity.
First verify that there are options traded for your company with an October 20, 2017 maturity. Go to Yahoo finance and print the following (make sure you have two copies, one for Professor Mooradian and one for you to keep. It is very important that you keep a copy.): the current stock price, the current option premiums (or prices), both bid and ask (You sell at the bid and buy at the ask.), for all options (all strike prices and all calls and puts) with an Oct 20 maturity. Please also include the contract name for each option, calls and puts. When you go to Yahoo, first go to Finance, then type in your stock ticker symbol in the blank Quote Lookup, then go to Options. Then it is very important to change the date in the drop down box under your company name and stock price to October 20, 2017. The contract name will include the maturity date; please verify that you have option premiums (or prices) for the October 20, 2017 maturity date.
The first part of your assignment is complete when you turn in your print out with the current stock price and all of the current option premiums (or prices) with Oct 20, 2017 maturity only. Note that you will have to repeat this part, if you have selected a company that another group has already selected. My advice is to pick a large enough company, so that there are multiple options traded but not so large that another group will have already selected it. Regardless, you want to organize your group of four students and turn in your stock and option prices as soon as possible, so that you will not have to repeat this part of the assignment. The stock and option prices that you turn in will constitute the starting point for your option trading strategy.
It is also useful to select a company where there is new information about the company released in September and expected to be released between mid-September and October 20. The quality of your assignment is related to your company selection. Do try to give some thought to your company selection.
DUE Sept 20: The print out with all group member names, name of your company, stock price and option prices (bid and ask), contract name for each option, and the date in which you obtained all prices. It is critical to use bid and ask prices for options because spreads can be large.
- The second part
Note that your research is very critical in determining your beliefs; however, you do not include your research in your Sept 27 deliverable. Your research will be the basis for your beliefs; however, your research will only become part of your presentation that will come after Oct 20.
DUE Sept 27: You must turn in a brief statement which states your beliefs about your company’s stock price on Oct 20. Your beliefs must state 2 prices, prices that are also (or close to) strike prices on options for this stock. Examples of what you might state include the following: 1) We expect the stock price (if for example currently $20) to increase to above $25 or to fall below $15. 2) We expect the stock price to increase to between $25 and $30. 3) We expect the stock price to decrease to between $10 and $15. 4) We expect the stock price to remain between $18 and $22. 5) We expect the price to increase to above $25 or decrease to below $15 but the decrease is more likely. THIS WILL BE YOUR PRIOR BELIEFS. Note that you do not need to include your research in this deliverable, but it is advisable to do your research before setting your prior beliefs. Once set, you cannot change your beliefs and they will determine whether your strategy is successful.
On Oct 20 you will need to get the stock price for your stock to be able to calculate the payoff on all expiring options.
Due Oct 25: To complete the third part of the assignment, turn in a print out (make sure you keep a copy) with the stock price for your company on Oct 20.
The fourth part of the assignment is to choose an option trading strategy that involves at least two options that mature Oct 20. You must choose a strategy that involves a cash outflow at the time you enter into the strategy. NOTE THAT YOUR OPTION TRADING STRATEGY MUST BE CONSISTENT WITH YOUR PRIOR BELIEFS.
Part 4: Calculate the profit from your option trading strategy on Oct 20.
Part 5: The group will need to schedule a 10 minute presentation (schedule with Professor Mooradian) for a class meeting date after Oct 25. We can have at most two presentations on any day, so schedule your date as soon as possible. If you wait until the last minute to schedule your presentation, you are unlikely to get your preferred date.
Part 6: Prepare and present your option trading strategy and its profit or loss. Be prepared to explain your strategy, your reasons for selecting the strategy to the class, your profit or loss, and explain why you either made or lost money. Is there something that occurred in September or October that helps to explain why you made or lost money? To do this you will need to research events related to your company just prior to option expiration. Explain the conditions under which you would make a profit and the conditions under which you would make a loss. The target audience for your presentation is your classmates. They will ask you questions (and will be graded on the quality of their questions) about your strategy. If your classmates cannot follow your explanation, the highest grade you can receive is a “C” for this assignment.
Parts 4 through 6 should be completed no later than Nov 29.
You will be graded on each of the following:
1) Your explanation/justification of your beliefs (your prior beliefs) about the change in stock price from Sept (your start date) to Oct 20. This must be based on research performed in Sept. Note: Ancient history of your company is irrelevant. Stick to recent and current news about your company.
2) Your choice of option trading strategy. This must be consistent with your research and the statement about your beliefs (prior beliefs) that you turned-in Sept 27.
3) Your calculation of your profit or loss. Explain how you calculated profit or loss. Make sure you are using appropriate bid and ask prices.
4) What news (most likely just prior to option expiration) explains your option trading strategy performance? What information about your company can explain why you make or lose money?
5) Have you completed your presentation in 10 minutes or less? Your time limit is a maximum of 10 minutes. You will be stopped once you reach 10 minutes. NO EXCEPTIONS. If you fail to explain/complete any of the above requirements, you will receive an unsatisfactory grade for those requirements. Make sure you rehearse your presentation and include only the most important information. Make sure you meet the time limit.
6) Bonus of 5 points: If you make at least a 100% profit AND your chosen option trading strategy is consistent with your prior beliefs. A necessary condition for the bonus is that you choose an option trading strategy consistent with your stated prior beliefs (#2 above).
