Options and Economics
harrykrish
SampleAssignment1.xlsxQ1-Netflix
| (i) Bear Spread Using Netflix Puts | i) Bull Spread Using Netflix Calls | iii) Straddle | iv) Strangle | ||||||||||||||||||||||||||||||||||||||||||||||||||
| NFLX Put Option Strike Price | Price of Put Option | Option Strike Price | Price of Option | Option Strike Price | Price of Call Option | Price of Put Option | Option Strike Price | Price of Call Option | Price of Put Option | ||||||||||||||||||||||||||||||||||||||||||||
| 335.00 | 10.90 | 335.00 | 34.05 | 335.00 | 34.05 | 10.90 | 335.00 | 34.05 | 10.90 | ||||||||||||||||||||||||||||||||||||||||||||
| 340.00 | 12.71 | 340.00 | 31.41 | 340.00 | 31.41 | 12.71 | 340.00 | 31.41 | 12.71 | ||||||||||||||||||||||||||||||||||||||||||||
| 345.00 | 14.30 | 345.00 | 28.78 | 345.00 | 28.78 | 14.30 | 345.00 | 28.78 | 14.30 | ||||||||||||||||||||||||||||||||||||||||||||
| 350.00 | 16.41 | 350.00 | 26.35 | 350.00 | 26.35 | 16.41 | 350.00 | 26.35 | 16.41 | ||||||||||||||||||||||||||||||||||||||||||||
| 355.00 | 18.78 | 355.00 | 23.14 | 355.00 | 23.14 | 18.78 | 355.00 | 23.14 | 18.78 | ||||||||||||||||||||||||||||||||||||||||||||
| 360.00 | 20.86 | 360.00 | 20.43 | 360.00 | 20.43 | 20.86 | 360.00 | 20.43 | 20.86 | ||||||||||||||||||||||||||||||||||||||||||||
| 365.00 | 23.30 | 365.00 | 17.90 | 365.00 | 17.90 | 23.30 | 365.00 | 17.90 | 23.30 | ||||||||||||||||||||||||||||||||||||||||||||
| 370.00 | 26.63 | 370.00 | 15.65 | 370.00 | 15.65 | 26.63 | 370.00 | 15.65 | 26.63 | ||||||||||||||||||||||||||||||||||||||||||||
| 375.00 | 29.58 | 375.00 | 13.70 | 375.00 | 13.70 | 29.58 | 375.00 | 13.70 | 29.58 | ||||||||||||||||||||||||||||||||||||||||||||
| 380.00 | 30.65 | 380.00 | 11.46 | 380.00 | 11.46 | 30.65 | 380.00 | 11.46 | 30.65 | ||||||||||||||||||||||||||||||||||||||||||||
| NFLX Share Price 01/03/2019 | $357.32 | NFLX Share Price 01/03/2019 | $357.32 | NFLX Share Price 01/03/2019 | $357.32 | NFLX Share Price 01/03/2019 | $357.32 | ||||||||||||||||||||||||||||||||||||||||||||||
| Strategy | Strike Price | Cashflow | Strategy | Strike Price | Cashflow | Strategy | Strike Price | Cashflow | Strategy | Strike Price | Cashflow | ||||||||||||||||||||||||||||||||||||||||||
| Sell low OTM | 345.00 | 1430.00 | Buy low ITM | 345.00 | -2878.00 | Buy 1 ATM call | 360.00 | -2043.00 | Buy 1 OTM put | 350.00 | -1641.00 | ||||||||||||||||||||||||||||||||||||||||||
| Buy high ITM | 360.00 | -2086.00 | Sell high OTM | 370.00 | 1565.00 | Buy 1 ATM put | 360.00 | -2086.00 | Buy 1 OTM call | 365.00 | -1790.00 | ||||||||||||||||||||||||||||||||||||||||||
| Initial Cashflow | -656.00 | Initial Cashflow | -1313.00 | Initial Cashflow | -4129.00 | Initial Cash Outflow | -3431.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| Stock Price | Profit from Long Put | Profit from Short Put | Total Profit | Stock Price | Profit from Long Call | Profit from Short Call | Total Profit | Stock Price | Profit from Long Call | Profit from Long Put | Total Profit | Stock Price | Profit from Long Call | Profit from Long Put | Total Profit | ||||||||||||||||||||||||||||||||||||||
| 315.00 | 2414.00 | -1570.00 | 844.00 | 330.00 | -2878.00 | 1565.00 | -1313.00 | 310.00 | -2043.00 | 2914.00 | 871.00 | 310.00 | -1790.00 | 2359.00 | 569.00 | ||||||||||||||||||||||||||||||||||||||
| 316.00 | 2314.00 | -1470.00 | 844.00 | 331.00 | -2878.00 | 1565.00 | -1313.00 | 311.00 | -2043.00 | 2814.00 | 771.00 | 311.00 | -1790.00 | 2259.00 | 469.00 | ||||||||||||||||||||||||||||||||||||||
| 317.00 | 2214.00 | -1370.00 | 844.00 | 332.00 | -2878.00 | 1565.00 | -1313.00 | 312.00 | -2043.00 | 2714.00 | 671.00 | 312.00 | -1790.00 | 2159.00 | 369.00 | ||||||||||||||||||||||||||||||||||||||
| 318.00 | 2114.00 | -1270.00 | 844.00 | 333.00 | -2878.00 | 1565.00 | -1313.00 | 313.00 | -2043.00 | 2614.00 | 571.00 | 313.00 | -1790.00 | 2059.00 | 269.00 | ||||||||||||||||||||||||||||||||||||||
| 319.00 | 2014.00 | -1170.00 | 844.00 | 334.00 | -2878.00 | 1565.00 | -1313.00 | 314.00 | -2043.00 | 2514.00 | 471.00 | 314.00 | -1790.00 | 1959.00 | 169.00 | ||||||||||||||||||||||||||||||||||||||
| 320.00 | 1914.00 | -1070.00 | 844.00 | 335.00 | -2878.00 | 1565.00 | -1313.00 | 315.00 | -2043.00 | 2414.00 | 371.00 | Payoff Matrix | 315.00 | -1790.00 | 1859.00 | 69.00 | |||||||||||||||||||||||||||||||||||||
| 321.00 | 1814.00 | -970.00 | 844.00 | 336.00 | -2878.00 | 1565.00 | -1313.00 | 316.00 | -2043.00 | 2314.00 | 271.00 | Stock Price Range | Payoff from Long Call Option | Payoff from Long Put Option | Total Payoff | Total Profit | 316.00 | -1790.00 | 1759.00 | -31.00 | Payoff Matrix | ||||||||||||||||||||||||||||||||
| 322.00 | 1714.00 | -870.00 | 844.00 | 337.00 | -2878.00 | 1565.00 | -1313.00 | 317.00 | -2043.00 | 2214.00 | 171.00 | ST ≤ $360 | 0 | $360 - ST | $360 - ST | 100($360 - ST) - $4129 | 317.00 | -1790.00 | 1659.00 | -131.00 | Stock Price Range | Payoff from Long Call Option | Payoff from Long Put Option | Total Payoff | Total Profit | ||||||||||||||||||||||||||||
| 323.00 | 1614.00 | -770.00 | 844.00 | 338.00 | -2878.00 | 1565.00 | -1313.00 | 318.00 | -2043.00 | 2114.00 | 71.00 | ST > $360 | ST - $360 | 0 | ST - $360 | 100(ST - $360) - $4129 | 318.00 | -1790.00 | 1559.00 | -231.00 | ST ≤ $350 | 0 | $350 - ST | $350 - ST | 100($350 - ST) - $3413 | ||||||||||||||||||||||||||||
| 324.00 | 1514.00 | -670.00 | 844.00 | Payoff Matrix | 339.00 | -2878.00 | 1565.00 | -1313.00 | Payoff Matrix | 319.00 | -2043.00 | 2014.00 | -29.00 | 319.00 | -1790.00 | 1459.00 | -331.00 | $350 ≤ ST ≤ $365 | 0 | 0 | 0 | - $3413 | |||||||||||||||||||||||||||||||
| 325.00 | 1414.00 | -570.00 | 844.00 | Stock Price Range | Payoff from Long Put Option | Payoff from Short Put Option | Total Payoff | Total Profit | 340.00 | -2878.00 | 1565.00 | -1313.00 | Stock Price Range | Payoff from Long Call Option | Payoff from Short Call Option | Total Payoff | Total Profit | 320.00 | -2043.00 | 1914.00 | -129.00 | 320.00 | -1790.00 | 1359.00 | -431.00 | ST ≥ $365 | ST - $365 | 0 | ST - $365 | 100(ST - $365) - $3413 | |||||||||||||||||||||||
| 326.00 | 1314.00 | -470.00 | 844.00 | ST ≤ $345 | $360 - ST | ST - $340 | $360 - $345 = $15 | 100($15) - $656 = $844 | 341.00 | -2878.00 | 1565.00 | -1313.00 | ST ≤ $345 | 0 | 0 | 0 | -$1313 | 321.00 | -2043.00 | 1814.00 | -229.00 | 321.00 | -1790.00 | 1259.00 | -531.00 | ||||||||||||||||||||||||||||
| 327.00 | 1214.00 | -370.00 | 844.00 | $345 ≤ ST ≤ $360 | $360 - ST | 0 | $360 - ST | 100($360 - ST) - $656 | 342.00 | -2878.00 | 1565.00 | -1313.00 | $345 ≤ ST ≤ $370 | ST - $345 | 0 | ST - $345 | 100(ST - $345) - $1313 | 322.00 | -2043.00 | 1714.00 | -329.00 | 322.00 | -1790.00 | 1159.00 | -631.00 | ||||||||||||||||||||||||||||
| 328.00 | 1114.00 | -270.00 | 844.00 | ST ≥ $360 | 0 | 0 | 0 | - $656 | 343.00 | -2878.00 | 1565.00 | -1313.00 | ST ≥ $370 | ST - $345 | $370 - ST | $370 - $345 = $25 | 100($25) - $1313 = $1187 | 323.00 | -2043.00 | 1614.00 | -429.00 | 323.00 | -1790.00 | 1059.00 | -731.00 | ||||||||||||||||||||||||||||
| 329.00 | 1014.00 | -170.00 | 844.00 | 344.00 | -2878.00 | 1565.00 | -1313.00 | 324.00 | -2043.00 | 1514.00 | -529.00 | 324.00 | -1790.00 | 959.00 | -831.00 | ||||||||||||||||||||||||||||||||||||||
| 330.00 | 914.00 | -70.00 | 844.00 | 345.00 | -2878.00 | 1565.00 | -1313.00 | 325.00 | -2043.00 | 1414.00 | -629.00 | 325.00 | -1790.00 | 859.00 | -931.00 | ||||||||||||||||||||||||||||||||||||||
| 331.00 | 814.00 | 30.00 | 844.00 | 346.00 | -2778.00 | 1565.00 | -1213.00 | 326.00 | -2043.00 | 1314.00 | -729.00 | 326.00 | -1790.00 | 759.00 | -1031.00 | ||||||||||||||||||||||||||||||||||||||
| 332.00 | 714.00 | 130.00 | 844.00 | 347.00 | -2678.00 | 1565.00 | -1113.00 | 327.00 | -2043.00 | 1214.00 | -829.00 | 327.00 | -1790.00 | 659.00 | -1131.00 | ||||||||||||||||||||||||||||||||||||||
| 333.00 | 614.00 | 230.00 | 844.00 | 348.00 | -2578.00 | 1565.00 | -1013.00 | 328.00 | -2043.00 | 1114.00 | -929.00 | 328.00 | -1790.00 | 559.00 | -1231.00 | ||||||||||||||||||||||||||||||||||||||
| 334.00 | 514.00 | 330.00 | 844.00 | 349.00 | -2478.00 | 1565.00 | -913.00 | 329.00 | -2043.00 | 1014.00 | -1029.00 | 329.00 | -1790.00 | 459.00 | -1331.00 | ||||||||||||||||||||||||||||||||||||||
| 335.00 | 414.00 | 430.00 | 844.00 | 350.00 | -2378.00 | 1565.00 | -813.00 | 330.00 | -2043.00 | 914.00 | -1129.00 | 330.00 | -1790.00 | 359.00 | -1431.00 | ||||||||||||||||||||||||||||||||||||||
| 336.00 | 314.00 | 530.00 | 844.00 | 351.00 | -2278.00 | 1565.00 | -713.00 | 331.00 | -2043.00 | 814.00 | -1229.00 | 331.00 | -1790.00 | 259.00 | -1531.00 | ||||||||||||||||||||||||||||||||||||||
| 337.00 | 214.00 | 630.00 | 844.00 | 352.00 | -2178.00 | 1565.00 | -613.00 | 332.00 | -2043.00 | 714.00 | -1329.00 | 332.00 | -1790.00 | 159.00 | -1631.00 | ||||||||||||||||||||||||||||||||||||||
| 338.00 | 114.00 | 730.00 | 844.00 | 353.00 | -2078.00 | 1565.00 | -513.00 | 333.00 | -2043.00 | 614.00 | -1429.00 | 333.00 | -1790.00 | 59.00 | -1731.00 | ||||||||||||||||||||||||||||||||||||||
| 339.00 | 14.00 | 830.00 | 844.00 | 354.00 | -1978.00 | 1565.00 | -413.00 | 334.00 | -2043.00 | 514.00 | -1529.00 | 334.00 | -1790.00 | -41.00 | -1831.00 | ||||||||||||||||||||||||||||||||||||||
| 340.00 | -86.00 | 930.00 | 844.00 | 355.00 | -1878.00 | 1565.00 | -313.00 | 335.00 | -2043.00 | 414.00 | -1629.00 | 335.00 | -1790.00 | -141.00 | -1931.00 | ||||||||||||||||||||||||||||||||||||||
| 341.00 | -186.00 | 1030.00 | 844.00 | 356.00 | -1778.00 | 1565.00 | -213.00 | 336.00 | -2043.00 | 314.00 | -1729.00 | 336.00 | -1790.00 | -241.00 | -2031.00 | ||||||||||||||||||||||||||||||||||||||
| 342.00 | -286.00 | 1130.00 | 844.00 | 357.00 | -1678.00 | 1565.00 | -113.00 | 337.00 | -2043.00 | 214.00 | -1829.00 | 337.00 | -1790.00 | -341.00 | -2131.00 | ||||||||||||||||||||||||||||||||||||||
| 343.00 | -386.00 | 1230.00 | 844.00 | 358.00 | -1578.00 | 1565.00 | -13.00 | 338.00 | -2043.00 | 114.00 | -1929.00 | 338.00 | -1790.00 | -441.00 | -2231.00 | ||||||||||||||||||||||||||||||||||||||
| 344.00 | -486.00 | 1330.00 | 844.00 | 359.00 | -1478.00 | 1565.00 | 87.00 | 339.00 | -2043.00 | 14.00 | -2029.00 | 339.00 | -1790.00 | -541.00 | -2331.00 | ||||||||||||||||||||||||||||||||||||||
| 345.00 | -586.00 | 1430.00 | 844.00 | 360.00 | -1378.00 | 1565.00 | 187.00 | 340.00 | -2043.00 | -86.00 | -2129.00 | 340.00 | -1790.00 | -641.00 | -2431.00 | ||||||||||||||||||||||||||||||||||||||
| 346.00 | -686.00 | 1430.00 | 744.00 | 361.00 | -1278.00 | 1565.00 | 287.00 | 341.00 | -2043.00 | -186.00 | -2229.00 | 341.00 | -1790.00 | -741.00 | -2531.00 | ||||||||||||||||||||||||||||||||||||||
| 347.00 | -786.00 | 1430.00 | 644.00 | 362.00 | -1178.00 | 1565.00 | 387.00 | 342.00 | -2043.00 | -286.00 | -2329.00 | 342.00 | -1790.00 | -841.00 | -2631.00 | ||||||||||||||||||||||||||||||||||||||
| 348.00 | -886.00 | 1430.00 | 544.00 | 363.00 | -1078.00 | 1565.00 | 487.00 | 343.00 | -2043.00 | -386.00 | -2429.00 | 343.00 | -1790.00 | -941.00 | -2731.00 | ||||||||||||||||||||||||||||||||||||||
| 349.00 | -986.00 | 1430.00 | 444.00 | 364.00 | -978.00 | 1565.00 | 587.00 | 344.00 | -2043.00 | -486.00 | -2529.00 | 344.00 | -1790.00 | -1041.00 | -2831.00 | ||||||||||||||||||||||||||||||||||||||
| 350.00 | -1086.00 | 1430.00 | 344.00 | 365.00 | -878.00 | 1565.00 | 687.00 | 345.00 | -2043.00 | -586.00 | -2629.00 | 345.00 | -1790.00 | -1141.00 | -2931.00 | ||||||||||||||||||||||||||||||||||||||
| 351.00 | -1186.00 | 1430.00 | 244.00 | 366.00 | -778.00 | 1565.00 | 787.00 | 346.00 | -2043.00 | -686.00 | -2729.00 | 346.00 | -1790.00 | -1241.00 | -3031.00 | ||||||||||||||||||||||||||||||||||||||
| 352.00 | -1286.00 | 1430.00 | 144.00 | 367.00 | -678.00 | 1565.00 | 887.00 | 347.00 | -2043.00 | -786.00 | -2829.00 | 347.00 | -1790.00 | -1341.00 | -3131.00 | ||||||||||||||||||||||||||||||||||||||
| 353.00 | -1386.00 | 1430.00 | 44.00 | 368.00 | -578.00 | 1565.00 | 987.00 | 348.00 | -2043.00 | -886.00 | -2929.00 | 348.00 | -1790.00 | -1441.00 | -3231.00 | ||||||||||||||||||||||||||||||||||||||
| 354.00 | -1486.00 | 1430.00 | -56.00 | 369.00 | -478.00 | 1565.00 | 1087.00 | 349.00 | -2043.00 | -986.00 | -3029.00 | 349.00 | -1790.00 | -1541.00 | -3331.00 | ||||||||||||||||||||||||||||||||||||||
| 355.00 | -1586.00 | 1430.00 | -156.00 | 370.00 | -378.00 | 1565.00 | 1187.00 | 350.00 | -2043.00 | -1086.00 | -3129.00 | 350.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 356.00 | -1686.00 | 1430.00 | -256.00 | 371.00 | -278.00 | 1465.00 | 1187.00 | 351.00 | -2043.00 | -1186.00 | -3229.00 | 351.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 357.00 | -1786.00 | 1430.00 | -356.00 | 372.00 | -178.00 | 1365.00 | 1187.00 | 352.00 | -2043.00 | -1286.00 | -3329.00 | 352.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 358.00 | -1886.00 | 1430.00 | -456.00 | 373.00 | -78.00 | 1265.00 | 1187.00 | 353.00 | -2043.00 | -1386.00 | -3429.00 | 353.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 359.00 | -1986.00 | 1430.00 | -556.00 | 374.00 | 22.00 | 1165.00 | 1187.00 | 354.00 | -2043.00 | -1486.00 | -3529.00 | 354.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 360.00 | -2086.00 | 1430.00 | -656.00 | 375.00 | 122.00 | 1065.00 | 1187.00 | 355.00 | -2043.00 | -1586.00 | -3629.00 | 355.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 361.00 | -2086.00 | 1430.00 | -656.00 | 376.00 | 222.00 | 965.00 | 1187.00 | 356.00 | -2043.00 | -1686.00 | -3729.00 | 356.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 362.00 | -2086.00 | 1430.00 | -656.00 | 377.00 | 322.00 | 865.00 | 1187.00 | 357.00 | -2043.00 | -1786.00 | -3829.00 | 357.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 363.00 | -2086.00 | 1430.00 | -656.00 | 378.00 | 422.00 | 765.00 | 1187.00 | 358.00 | -2043.00 | -1886.00 | -3929.00 | 358.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 364.00 | -2086.00 | 1430.00 | -656.00 | 379.00 | 522.00 | 665.00 | 1187.00 | 359.00 | -2043.00 | -1986.00 | -4029.00 | 359.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 365.00 | -2086.00 | 1430.00 | -656.00 | 380.00 | 622.00 | 565.00 | 1187.00 | 360.00 | -2043.00 | -2086.00 | -4129.00 | 360.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 366.00 | -2086.00 | 1430.00 | -656.00 | 381.00 | 722.00 | 465.00 | 1187.00 | 361.00 | -1943.00 | -2086.00 | -4029.00 | 361.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 367.00 | -2086.00 | 1430.00 | -656.00 | 382.00 | 822.00 | 365.00 | 1187.00 | 362.00 | -1843.00 | -2086.00 | -3929.00 | 362.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 368.00 | -2086.00 | 1430.00 | -656.00 | 383.00 | 922.00 | 265.00 | 1187.00 | 363.00 | -1743.00 | -2086.00 | -3829.00 | 363.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 369.00 | -2086.00 | 1430.00 | -656.00 | 384.00 | 1022.00 | 165.00 | 1187.00 | 364.00 | -1643.00 | -2086.00 | -3729.00 | 364.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 370.00 | -2086.00 | 1430.00 | -656.00 | 385.00 | 1122.00 | 65.00 | 1187.00 | 365.00 | -1543.00 | -2086.00 | -3629.00 | 365.00 | -1790.00 | -1641.00 | -3431.00 | ||||||||||||||||||||||||||||||||||||||
| 371.00 | -2086.00 | 1430.00 | -656.00 | 386.00 | 1222.00 | -35.00 | 1187.00 | 366.00 | -1443.00 | -2086.00 | -3529.00 | 366.00 | -1690.00 | -1641.00 | -3331.00 | ||||||||||||||||||||||||||||||||||||||
| 372.00 | -2086.00 | 1430.00 | -656.00 | 387.00 | 1322.00 | -135.00 | 1187.00 | 367.00 | -1343.00 | -2086.00 | -3429.00 | 367.00 | -1590.00 | -1641.00 | -3231.00 | ||||||||||||||||||||||||||||||||||||||
| 373.00 | -2086.00 | 1430.00 | -656.00 | 388.00 | 1422.00 | -235.00 | 1187.00 | 368.00 | -1243.00 | -2086.00 | -3329.00 | 368.00 | -1490.00 | -1641.00 | -3131.00 | ||||||||||||||||||||||||||||||||||||||
| 374.00 | -2086.00 | 1430.00 | -656.00 | 389.00 | 1522.00 | -335.00 | 1187.00 | 369.00 | -1143.00 | -2086.00 | -3229.00 | 369.00 | -1390.00 | -1641.00 | -3031.00 | ||||||||||||||||||||||||||||||||||||||
| 375.00 | -2086.00 | 1430.00 | -656.00 | 390.00 | 1622.00 | -435.00 | 1187.00 | 370.00 | -1043.00 | -2086.00 | -3129.00 | 370.00 | -1290.00 | -1641.00 | -2931.00 | ||||||||||||||||||||||||||||||||||||||
| 376.00 | -2086.00 | 1430.00 | -656.00 | 371.00 | -943.00 | -2086.00 | -3029.00 | 371.00 | -1190.00 | -1641.00 | -2831.00 | ||||||||||||||||||||||||||||||||||||||||||
| 377.00 | -2086.00 | 1430.00 | -656.00 | 372.00 | -843.00 | -2086.00 | -2929.00 | 372.00 | -1090.00 | -1641.00 | -2731.00 | ||||||||||||||||||||||||||||||||||||||||||
| 378.00 | -2086.00 | 1430.00 | -656.00 | 373.00 | -743.00 | -2086.00 | -2829.00 | 373.00 | -990.00 | -1641.00 | -2631.00 | ||||||||||||||||||||||||||||||||||||||||||
| 379.00 | -2086.00 | 1430.00 | -656.00 | 374.00 | -643.00 | -2086.00 | -2729.00 | 374.00 | -890.00 | -1641.00 | -2531.00 | ||||||||||||||||||||||||||||||||||||||||||
| 380.00 | -2086.00 | 1430.00 | -656.00 | 375.00 | -543.00 | -2086.00 | -2629.00 | 375.00 | -790.00 | -1641.00 | -2431.00 | ||||||||||||||||||||||||||||||||||||||||||
| 381.00 | -2086.00 | 1430.00 | -656.00 | 376.00 | -443.00 | -2086.00 | -2529.00 | 376.00 | -690.00 | -1641.00 | -2331.00 | ||||||||||||||||||||||||||||||||||||||||||
| 382.00 | -2086.00 | 1430.00 | -656.00 | 377.00 | -343.00 | -2086.00 | -2429.00 | 377.00 | -590.00 | -1641.00 | -2231.00 | ||||||||||||||||||||||||||||||||||||||||||
| 383.00 | -2086.00 | 1430.00 | -656.00 | 378.00 | -243.00 | -2086.00 | -2329.00 | 378.00 | -490.00 | -1641.00 | -2131.00 | ||||||||||||||||||||||||||||||||||||||||||
| 384.00 | -2086.00 | 1430.00 | -656.00 | 379.00 | -143.00 | -2086.00 | -2229.00 | 379.00 | -390.00 | -1641.00 | -2031.00 | ||||||||||||||||||||||||||||||||||||||||||
| 385.00 | -2086.00 | 1430.00 | -656.00 | 380.00 | -43.00 | -2086.00 | -2129.00 | 380.00 | -290.00 | -1641.00 | -1931.00 | ||||||||||||||||||||||||||||||||||||||||||
| 381.00 | 57.00 | -2086.00 | -2029.00 | 381.00 | -190.00 | -1641.00 | -1831.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 382.00 | 157.00 | -2086.00 | -1929.00 | 382.00 | -90.00 | -1641.00 | -1731.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 383.00 | 257.00 | -2086.00 | -1829.00 | 383.00 | 10.00 | -1641.00 | -1631.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 384.00 | 357.00 | -2086.00 | -1729.00 | 384.00 | 110.00 | -1641.00 | -1531.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 385.00 | 457.00 | -2086.00 | -1629.00 | 385.00 | 210.00 | -1641.00 | -1431.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 386.00 | 557.00 | -2086.00 | -1529.00 | 386.00 | 310.00 | -1641.00 | -1331.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 387.00 | 657.00 | -2086.00 | -1429.00 | 387.00 | 410.00 | -1641.00 | -1231.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 388.00 | 757.00 | -2086.00 | -1329.00 | 388.00 | 510.00 | -1641.00 | -1131.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 389.00 | 857.00 | -2086.00 | -1229.00 | 389.00 | 610.00 | -1641.00 | -1031.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 390.00 | 957.00 | -2086.00 | -1129.00 | 390.00 | 710.00 | -1641.00 | -931.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 391.00 | 1057.00 | -2086.00 | -1029.00 | 391.00 | 810.00 | -1641.00 | -831.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 392.00 | 1157.00 | -2086.00 | -929.00 | 392.00 | 910.00 | -1641.00 | -731.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 393.00 | 1257.00 | -2086.00 | -829.00 | 393.00 | 1010.00 | -1641.00 | -631.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 394.00 | 1357.00 | -2086.00 | -729.00 | 394.00 | 1110.00 | -1641.00 | -531.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 395.00 | 1457.00 | -2086.00 | -629.00 | 395.00 | 1210.00 | -1641.00 | -431.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 396.00 | 1557.00 | -2086.00 | -529.00 | 396.00 | 1310.00 | -1641.00 | -331.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 397.00 | 1657.00 | -2086.00 | -429.00 | 397.00 | 1410.00 | -1641.00 | -231.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 398.00 | 1757.00 | -2086.00 | -329.00 | 398.00 | 1510.00 | -1641.00 | -131.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 399.00 | 1857.00 | -2086.00 | -229.00 | 399.00 | 1610.00 | -1641.00 | -31.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 400.00 | 1957.00 | -2086.00 | -129.00 | 400.00 | 1710.00 | -1641.00 | 69.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 401.00 | 2057.00 | -2086.00 | -29.00 | 401.00 | 1810.00 | -1641.00 | 169.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 402.00 | 2157.00 | -2086.00 | 71.00 | 402.00 | 1910.00 | -1641.00 | 269.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 403.00 | 2257.00 | -2086.00 | 171.00 | 403.00 | 2010.00 | -1641.00 | 369.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 404.00 | 2357.00 | -2086.00 | 271.00 | 404.00 | 2110.00 | -1641.00 | 469.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 405.00 | 2457.00 | -2086.00 | 371.00 | 405.00 | 2210.00 | -1641.00 | 569.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 406.00 | 2557.00 | -2086.00 | 471.00 | 406.00 | 2310.00 | -1641.00 | 669.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 407.00 | 2657.00 | -2086.00 | 571.00 | 407.00 | 2410.00 | -1641.00 | 769.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 408.00 | 2757.00 | -2086.00 | 671.00 | 408.00 | 2510.00 | -1641.00 | 869.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 409.00 | 2857.00 | -2086.00 | 771.00 | 409.00 | 2610.00 | -1641.00 | 969.00 | ||||||||||||||||||||||||||||||||||||||||||||||
| 410.00 | 2957.00 | -2086.00 | 871.00 | 410.00 | 2710.00 | -1641.00 | 1069.00 |
Bear Spread Using Puts A bear spread is useful if the option trader believes that the price of the underlying asset will moderately decline in the near term. This involves taking a position in two or more options of the same type and in this case; puts. To create the bear spread, we ● Sell 1 put option with a lower strike price K1 and ● Buy 1 put option with a higher strike price K2 with the same time to maturity. On the 1st March 2019, NFLX share price stood at $357.32. The expiration date of the option contracts is 18th April 2019. To generate a bear spread using puts we ● Sell 1 out-of-the-money put option with strike price K1 = $345 for $14.30 and ● Buy 1 in-the-money put option with strike price K2 = $360 for $20.86. A bear spread using puts has an initial cash outflow. We have a net premium of 100($14.30) - 100($20.86) = - $656. The break-even point for this particular bear spread is the strike price of the long put minus the initial cash outflow, $360 - $6.56 = $353.44. The maximum profit achieved by this strategy is $844 which is the difference in the two strike prices minus the initial premium paid. The maximum loss is simply $656 which is the net premium paid. A bear spread limits both the upside profit potential and the downside risk. The cost of establishing the bearish position is partially offset by selling the $345 option. However, this action means that the trader forgoes the opportunity to make a large profit in the event that Netflix's share price plummets.
Bear Spread Using Puts
Profit from Short Put 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379 380 381 382 383 384 385 -1570 -1470 -1370 -1270 -1170 -1070 -970 -870 -770 -670 -570 -470 -370 -270 -170 -70 30 130 230 330 430 530 630 730 830 930 1030 1130 1230 1330 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 1430 Profit from Long Put 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379 380 381 382 383 384 385 2414 2314 2214 2114 2014 1914 1814 1714 1614 1514 1414 1314 1214 1114 1014 914 814 714 614 514 414 314 214 114 14 -86 -186 -286 -386 -486 -586 -686 -786 -886 -986 -1086 -1186 -1286 -1386 -1486 -1586 -1686 -1786 -1886 -1986 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 Total Profit 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379 380 381 382 383 384 385 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 844 744 644 544 444 344 244 144 44 -56 -156 -256 -356 -456 -556 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656 -656
Bull Spread Using Calls
Profit from Long Call 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379 380 381 382 383 384 385 386 387 388 389 390 -2878 -2878 -2878 -2878 -2878 -2878 -2878 -2878 -2878 -2878 -2878 -2878 -2878 -2878 -2878 -2878 -277 8 -2678 -2578 -2478 -2378 -2278 -2178 -2078 -1978 -1878 -1778 -1678 -1578 -1478 -1378 -1278 -1178 -1078 -978 -878 -778 -678 -578 -478 -378 -278 -178 -78 22 122 222 322 422 522 622 722 822 922 1022 1122 1222 1322 1422 1522 1622 Profit from Short Call 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379 380 381 382 383 384 385 386 387 388 389 390 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1565 1465 1365 1265 1165 1065 965 865 765 665 565 465 365 265 165 65 -35 -135 -235 -335 -435 Total Profit 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379 380 381 382 383 384 385 386 387 388 389 390 -1313 -1313 -1313 -1313 -1313 -1313 -1313 -1313 -1313 -1313 -1313 -1313 -1313 -1313 -1313 -1313 -1213 -1113 -1013 -913 -813 -713 -613 -513 -413 -313 -213 -113 -13 87 187 287 387 487 587 687 787 887 987 1087 1187 1187 1187 1187 1187 1187 1187 1187 1187 1187 1187 1187 1187 1187 1187 1187 1187 1187 1187 1187 1187
Strangle
Profit from Long Call 310 311 312 313 314 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379 380 381 382 383 384 385 386 387 388 389 390 391 392 393 394 395 396 397 398 399 400 401 402 403 404 405 406 407 408 409 410 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1789.9999999999998 -1689.9999999999998 -1589.9999999999998 -1489.9999999999998 -1389.9999999999998 -1289.9999999999998 -1189.9999999999998 -1089.9999999999998 -989.99999999999977 -889.99999999999977 -789.99999999999977 -689.99999999999977 -589.99999999999977 -489.99999999999977 -389.99999999999977 -289.99999999999977 -189.99999999999977 -89.999999999999773 10.000000000000227 110.00000000000023 210.00000000000023 310.00000000000023 410.00000000000023 510.00000000000023 610.00000000000023 710.00000000000023 810.00000000000023 910.00000000000023 1010.0000000000002 1110.0000000000002 1210.0000000000002 1310.0000000000002 1410.0000000000002 1510.0000000000002 1610.0000000000002 1710.0000000000002 1810.0000000000002 1910.0000000000002 2010.0000000000002 2110 2210 2310 2410 2510 2610 2710 Profit from Long Put 310 311 312 313 314 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379 380 381 382 383 384 385 386 387 388 389 390 391 392 393 394 395 396 397 398 399 400 401 402 403 404 405 406 407 408 409 410 2359 2259 2159 2059 1959 1859 1759 1659 1559 1459 1359 1259 1159 1059 959 859 759 659 559 459 359 259 159 59 -41 -141 -241 -341 -441 -541 -641 -741 -841 -941 -1041 -1141 -1241 -1341 -1441 -1541 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 -1641 Total Profit 310 311 312 313 314 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379 380 381 382 383 384 385 386 387 388 389 390 391 392 393 394 395 396 397 398 399 400 401 402 403 404 405 406 407 408 409 410 569.00000000000023 469.00000000000023 369.00000000000023 269.00000000000023 169.00000000000023 69.000000000000227 -30.999999999999773 -130.99999999999977 -230.99999999999977 -330.99999999999977 -430.99999999999977 -530.99999999999977 -630.99999999999977 -730.99999999999977 -830.99999999999977 -930.99999999999977 -1030.9999999999998 -1130.9999999999998 -1230.9999999999998 -1330.9999999999998 -1430.9999999999998 -1530.9999999999998 -1630.9999999999998 -1730.9999999999998 -1830.9999999999998 -1930.9999999999998 -2030.9999999999998 -2131 -2231 -2331 -2431 -2531 -2631 -2731 -2831 -2931 -3031 -3131 -3231 -3331 -3431 -3431 -3431 -3431 -3431 -3431 -3431 -3431 -3431 -3431 -3431 -3431 -3431 -3431 -3431 -3431 -3331 -3231 -3131 -3031 -2931 -2831 -2731 -2631 -2531 -2431 -2331 -2231 -2131 -2030.9999999999998 -1930.9999999999998 -1830.9999999999998 -1730.9999999999998 -1630.9999999999998 -1530.9999999999998 -1430.9999999999998 -1330.9999999999998 -1230.9999999999998 -1130.9999999999998 -1030.9999999999998 -930.99999999999977 -830.99999999999977 -730.99999999999977 -630.99999999999977 -530.99999999999977 -430.99999999999977 -330.99999999999977 -230.99999999999977 -130.99999999999977 -30.999999999999773 69.000000000000227 169.00000000000023 269.00000000000023 369.00000000000023 469 569 669 769 869 969 1069
Straddle
Profit from Long Call 310 311 312 313 314 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379 380 381 382 383 384 385 386 387 388 389 390 391 392 393 394 395 396 397 398 399 400 401 402 403 404 405 406 407 408 409 410 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -2043 -1943 -1843 -1743 -1643 -1543 -1443 -1343 -1243 -1143 -1043 -943 -843 -743 -643 -543 -443 -343 -243 -143 -43 57 157 257 357 457 557 657 757 857 957 1057 1157 1257 1357 1457 1557 1657 1757 1857 1957 2057 2157 2257 235 7 2457 2557 2657 2757 2857 2957 Profit from Long Put 310 311 312 313 314 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379 380 381 382 383 384 385 386 387 388 389 390 391 392 393 394 395 396 397 398 399 400 401 402 403 404 405 406 407 408 409 410 2914 2814 2714 2614 2514 2414 2314 2214 2114 2014 1914 1814 1714 1614 1514 1414 1314 1214 1114 1014 914 814 714 614 514 414 314 214 114 14 -86 -186 -286 -386 -486 -586 -686 -786 -886 -986 -1086 -1186 -1286 -1386 -1486 -1586 -1686 -1786 -1886 -1986 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 -2086 Total Profit 310 311 312 313 314 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379 380 381 382 383 384 385 386 387 388 389 390 391 392 393 394 395 396 397 398 399 400 401 402 403 404 405 406 407 408 409 410 871 771 671 571 471 371 271 171 71 -29 -129 -229 -329 -429 -529 -629 -729 -829 -929 -1029 -1129 -1229 -1329 -1429 -1529 -1629 -1729 -1829 -1929 -2029 -2129 -2229 -2329 -2429 -2529 -2629 -2729 -2829 -2929 -3029 -3129 -3229 -3329 -3429 -3529 -3629 -3729 -3829 -3929 -4029 -4129 -4029 -3929 -3829 -3729 -3629 -3529 -3429 -3329 -3229 -3129 -3029 -2929 -2829 -2729 -2629 -2529 -2429 -2329 -2229 -2129 -2029 -1929 -1829 -1729 -1629 -1529 -1429 -1329 -1229 -1129 -1029 -929 -829 -729 -629 -529 -429 -329 -229 -129 -29 71 171 271 371 471 571 671 771 871
Bull Spread Using Calls A bull spread is an appropriate strategy if the option trader believes that the price of the underlying asset will rise moderately in the near term. This involves taking a position in two or more options of the same type and in this case; calls. To create the bull spread, we ● Buy 1 call option with a lower strike price K1 and ● Sell 1 call option with a higher strike price K2 with the same time to maturity. On the 1st March 2019, NFLX share price stood at $357.32. The expiration date of the option contracts is 18th April 2019. To generate a bull spread using puts we ● Buy 1 in-of-the-money put option with strike price K1 =$345 for $28.78 and ● Sell 1 out-the-money put option with strike price K2 = $370 for $15.65. This bull spread is somewhere between conservative and aggressive as initially one call is in-the-money and the other is out-of-the-money. A bull spread using calls also has an initial cash outflow. We have a net premium of -100($28.78) + 100($15.65) = -$1313. In this case, the break-even point is the strike price of the short call plus the net premium, $345 + $13.13 = $358.13. The difference between the two strike prices minus the initial premium paid gives the maximum profit of $1187. The net premium paid sets the maximum loss $1313. Similar to a bear spread, bull spread limits the upside profit potential and the downside risk. One way of looking at this is that an option trader has a $345 call option and by shorting the $370 call option, they give up some of the upside potential if Netflix's shares sky-rocket but in return, they receive the price of the $370 option.
Strangle A strangle is a good strategy if the option trader thinks that the there will be a large movement in underlying price but is unsure of the direction. This requires ● Buying 1 put option with a lower strike price K1 and ● Buying 1 call option with a higher strike price K2 with the same time to maturity. On the 1st March 2019, NFLX share price stood at $357.32. The expiration date of the option contracts is 18th April 2019. To build a strangle, we: ● Buy 1 out-of-the-money put option with strike price K1 =$350 for $16.41 and ● Buy 1 out-of-the-money call option with strike price K2 = $365 for $17.90. A strangle generates an initial cash outflow. We have a net premium of - 100($16.41) + 100($17.90) = - $3431 Once again, the profit potential is unlimited. The break-even points are the put strike minus the net premium, $350 - $34.31 = $315.69 and the call strike plus the net premium $360 + $34.31 = $394.31. The downside risk is limited to the net premium paid. The profit pattern depends on how far apart the two strike prices are. The farther apart they are, the farther they have to move to realise a profit but the less the downside risk. This strangle has less downside risk compared to the straddle in part (iii) but a more significant price movement is required to profit.
Straddle A straddle is an appropriate strategy if the option trader believes that the price of the underlying asset will rise or fall significantly. This involves simultaneously buying 1 call option and 1 put option with the same strike price K and the same time to maturity. On the 1st March 2019, NFLX share price was at $357.32. The expiration date of the option contracts is 18th April 2019. To create a straddle we ● Buy 1 at-the-money call option with strike price K = $360 for $20.43 and ● Buy 1 at-the-money put option with strike price K = $360 for $20.86. There isn't an option with a strike price matching the current stock price so we choose $360. A straddle involves an initial cash outflow. We have a net premium of - 100($20.43) - 100($20.86) = -$4129 With this strategy, the profit potential is unlimited. The trader will profit if the price of Netflix's shares rise or fall by an amount greater than the total cost of the premium paid. In this case, the break-even points are ($360 - $41.29 = ) $318.71 and ($360 + $41.29 = ) $401.29. The downside risk is limited so that the maximum loss is the net premium.
Q2-VIX
| VIX | (i) Long Call | (ii) Vertical Call Spread | |||||||||||||||||||||||||||||||||||||||
| Expected price | $18.00 | Strategy | Strike | Cashflow | |||||||||||||||||||||||||||||||||||||
| Strike Price | $14.00 | Buy | 17.00 | -120.00 | |||||||||||||||||||||||||||||||||||||
| Cost | $3.00 | Sell | 20.00 | 20.00 | |||||||||||||||||||||||||||||||||||||
| Initial Cashflow | -100.00 | ||||||||||||||||||||||||||||||||||||||||
| Possible VIX Index Values | Profit from Long Call | ||||||||||||||||||||||||||||||||||||||||
| 1.00 | -300.00 | Possible VIX Index Values | Profit from Long Call | Profit from Short Call | Total Profit | ||||||||||||||||||||||||||||||||||||
| 2.00 | -300.00 | 1.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 3.00 | -300.00 | 2.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 4.00 | -300.00 | 3.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 5.00 | -300.00 | 4.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 6.00 | -300.00 | 5.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 7.00 | -300.00 | 6.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 8.00 | -300.00 | 7.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 9.00 | -300.00 | 8.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 10.00 | -300.00 | 9.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 11.00 | -300.00 | 10.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 12.00 | -300.00 | 11.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 13.00 | -300.00 | 12.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 14.00 | -300.00 | 13.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 15.00 | -200.00 | 14.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 16.00 | -100.00 | 15.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 17.00 | 0.00 | 16.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 18.00 | 100.00 | 17.00 | -120.00 | 20.00 | -100.00 | ||||||||||||||||||||||||||||||||||||
| 19.00 | 200.00 | 18.00 | -20.00 | 20.00 | 0.00 | ||||||||||||||||||||||||||||||||||||
| 20.00 | 300.00 | Payoff Matrix | 19.00 | 80.00 | 20.00 | 100.00 | |||||||||||||||||||||||||||||||||||
| 21.00 | 400.00 | VIX Index Value Range | Payoff from Long Call Option | Total Profit | 20.00 | 180.00 | 20.00 | 200.00 | Payoff Matrix | ||||||||||||||||||||||||||||||||
| 22.00 | 500.00 | ST ≤ 14.00 | 0 | - $300 | 21.00 | 280.00 | -80.00 | 200.00 | VIX Value Index Range | Payoff from Long Call Option | Payoff from Short Call Option | Total Payoff | Total Profit | ||||||||||||||||||||||||||||
| 23.00 | 600.00 | ST > $14.00 | ST - $14.00 | 100(ST - 14.00) - $300 | 22.00 | 380.00 | -180.00 | 200.00 | ST ≤ 17.00 | 0 | 0 | 0 | -$100 | ||||||||||||||||||||||||||||
| 24.00 | 700.00 | 23.00 | 480.00 | -280.00 | 200.00 | 17.00 ≤ ST ≤ 20.00 | ST - 17.00 | 0 | ST - 17.00 | 100(ST - 17.00) - $100 | |||||||||||||||||||||||||||||||
| 25.00 | 800.00 | 24.00 | 580.00 | -380.00 | 200.00 | ST ≥ 20.00 | ST - 17.00 | 20.00- ST | 20.00 - 17.00 = 3.00 | 100(3.00) - $100 = $200 | |||||||||||||||||||||||||||||||
| 26.00 | 900.00 | 25.00 | 680.00 | -480.00 | 200.00 | ||||||||||||||||||||||||||||||||||||
| 27.00 | 1000.00 | 26.00 | 780.00 | -580.00 | 200.00 | ||||||||||||||||||||||||||||||||||||
| 28.00 | 1100.00 | 27.00 | 880.00 | -680.00 | 200.00 | ||||||||||||||||||||||||||||||||||||
| 29.00 | 1200.00 | 28.00 | 980.00 | -780.00 | 200.00 | ||||||||||||||||||||||||||||||||||||
| 30.00 | 1300.00 | 29.00 | 1080.00 | -880.00 | 200.00 | ||||||||||||||||||||||||||||||||||||
| 30.00 | 1180.00 | -980.00 | 200.00 | ||||||||||||||||||||||||||||||||||||||
The VIX Index The VIX Index, sometimes referred to as the "fear index", is a mathematical measure designed to express investors' consensus view of future expected stock market volatility. This forward-looking index is the implied volatility of the 30-day options on the S&P 500. It is calculated by using the midpoint of real-time S&P 500 Index (SPX) option bid/ask quotes with a time to maturity of between 23 and 37 days . On the 22nd February, the VIX Index traded at 14.21. This can be considered a low level . A level of 14.21 means that the S&P 500 index is expected to move by approximately 4% (= 14.21%/ SQRT(12)) in the following month. In general, VIX values below 20 usually correspond to stable, low volatile markets and implies a bullish sentiment among traders. The relatively low volatility and downside risk attracts investors to the S&P 500. This suggests that investors are confident in the U.S. stock market, enjoying a period of relatively low volatility, and the consensus is that this stable environment will continue. On the other hand, a VIX value greater than 30 is considered a high volatility level. This large volatility typically results from increased risk, uncertainty and escalated fear of the market. A high VIX level is generally perceived as a bearish signal as large deviations in stock prices will be anticipated due to increased risk. The convergent-divergent relationship between the VIX Index and the S&P 500 Index Futures gives insights into the expectations of the near-term market and enable trade planning. For example, on the 22nd February, the S&P 500 stood at $2791.25. Over the preceding 3 months, the S&P 500 futures climbed while the VIX declined. The combination of a falling VIX and rising S&P 500 futures is a bullish convergence that increases the chances for an upside trend day. Risks Involved with Volatility Trading Many investors and analysts have expressed their concern with trading on the VIX index or more generally, volatility trading. This trading consists of speculating on future volatility, measure by implied volatility, which is itself determined by options prices. A feedback loop exists as traders used expected volatility to calculate option prices from which implied volatility is derived. Investors worry about the risks associated with popular trading tool that is also a major input into risk-management calculations. It's important to keep in mind that implied volatility isn't the same as volatility and may act differently. In practice, implied volatility is a poor predictor and it's extremely difficult to anticipate events like natural disasters, pandemics, financial crises, unexpected political events like Brexit, or even unexpected growth or inflation. Consider the case in April 2018 where the VIX Index unexpectedly surged due to only a few but significant outlandish bets in the options market. If a trader expects the VIX to rise, there are some factors that warrant consideration. Trading volatility is complex and traders need to be alert to react to any changes. Price fluctuations in one market are transmitted rapidly across other markets as volatilities are re-rated and expectations are adjusted. Most trading is performed on a leveraged basis so margins calls quicken the rebalancing, traders move to increase their cash levels and contagion occurs. These issues are then compounded by a drop in trading liquidity. Higher volatility leads to a rise in the measured market risk. This in turn increases credit risk, raises the cost of trading, a greater amount of collateral is needed for trading and funding becomes more expensive. An escalation in risk harms the real economy and warps the financial system.
Profit from Long Call
Profit from Long Call 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 -300 -300 -300 -300 -300 -300 -300 -300 -300 -300 -300 -300 -300 -300 -200 -100 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300
Profit from Vertical Call Spread
Profit from Long Call 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 -120 -120 -120 -120 -120 -120 -120 -120 -120 -120 -120 -120 -120 -120 -120 -120 -120 -19.999999999999996 80 180 280 380 480 580 680 780 880.00000000000011 980.00000000000011 1080 1180 Profit from Short Call 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 -80 -180 -280 -380 -480 -580 -680 -780 -880.00000000000011 -980.00000000000011 Total Profit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 -100 -100 -100 -100 -100 -100 -100 -100 -100 -100 -100 -100 -100 -100 -100 -100 -100 0 100 200 200 200 200 200 200 200 200.00000000000011 200.00000000000011 199.99999999999989 199.99999999999989
Long Call On the 22nd February 2019, the VIX was trading at 14.21. The expiration date of the option contract is 27th March 2019. Buying a call option on the VIX Index an appropriate strategy if an increase in stock market volatility is forecasted. Let's suppose that the VIX is expected to increase to 18.00 by the expiration date. A trader purchases 1 call option with strike price K = 14.00 for $3.00. This involves a net premium of - $300.00 Factors to Consider If the VIX is below 14.00 at expiration, the call option expires worthless and the initial investment of $300 is lost. This is the maximum loss of this strategy and limits the exposure if the VIX falls by expiration date. It should be noted that the stock markets experienced a quiet start to 2019 which is unusual given how late the US is in its economic. In the even that 2019's low volatility continues over the next few months, the trader's loss is limited. The break-even point is the strike price plus the cost of the premium paid, 14.00 + 3.00 = 17.00. If the VIX Index settles above 17.00 at expiration, the call is exercised and a profit ensues. With this strategy, the profit potential is unlimited. There is much concern about the US economy as signs of economic weakness have persisted despite the market's strong recovery. More volatility could stem from this inconsistency, causing the VIX to rise. The status of Brexit and the progression of trade discussions between the US and China are critical events that have the potential to massively increase volatility and any surprise could result in very substantial profits for the trader. If the VIX Index stands between 14.00 and 17.00 on the expiration date, the trader suffers a loss of the value of the option minus the initial investment, all times $100.
Vertical Call Spread On the 22nd February 2019, the VIX was trading at 14.21. The expiration date of the option contracts is 27th March 2019. A vertical call spread is an appropriate strategy if a trader is bullish and expects the VIX Index to climb in the near future. Let's say that the VIX is expected to increase to 18.00 by the expiration date. To set up a vertial spread: ● Buy 1 call option with strike price K1 = 17.00 for $1.20 ● Sell 1 call option with strike price K2 = 20.00 for $0.20. The net premium associated with this is - 100($1.20) + 100($0.20) = - $100. Factors to Consider In this case, the break-even point is the strike price of the short call plus the net premium, 17.00+ $1.00 = 18.00. The difference between the two strike prices minus the initial premium paid gives the maximum profit of $200. The net premium paid gives the maximum loss $100. Similar to a long call, the vertical call spread has a floor below which the trader won't continue to lose money, in thecase of a stable and low volatile market in the near-term. The exposure is limited to $100 and this is considerably lower than the risk involved with a long call strategy. On the other hand, a vertical call spread has limited upside potential as it's forgone to mitigate risk. In the event of an unlikely outcome of the US and China's trade talks, volatility will skyrocket but profit will be capped at $200.
Q3-Visa
| Visa | (i) Protective Put | (ii) Butterfly Spread | (iii) Strangle | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Visa Options | Strategy | Strike | Cashflow | Strategy | Strike | Cost | Strategy | Strike | Cashflow | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Calls | Puts | Buy 1 put | 155.00 | -167.00 | Buy 1 call | 145.00 | -1105.00 | Buy 1 put | 147.00 | -31.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Bid | Ask | Strike | Bid | Ask | Buy stock | -15533.00 | Sell 2 calls | 155.00 | 446.00 | Buy 1 call | 162.50 | -12.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 10.60 | 11.05 | 145.00 | 0.18 | 0.33 | Initial Cash Outflow | -15700.00 | Buy 1 call | 165.00 | -15.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 8.70 | 9.15 | 147.00 | 0.27 | 0.31 | Initial Cashflow | -674.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 6.05 | 6.35 | 150.00 | 0.50 | 0.56 | Stock Price | Profit from Long Position | Profit from Long Put | Total Profit | Stock Price | Profit from Long Call | Profit from Long Put | Total Profit | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 4.00 | 4.20 | 152.50 | 0.87 | 0.93 | 140.00 | -1533.00 | 1333.00 | -200.00 | Stock Price | Profit from Long Call K=145 | Profit from 2 Short Calls K=155 | Profit from Long Call K=165 | Total Profit | 140.00 | -12.00 | 669.00 | 657.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2.23 | 2.37 | 155.00 | 1.58 | 1.67 | 141.00 | -1433.00 | 1233.00 | -200.00 | 140.00 | -11.05 | 4.46 | -0.15 | -6.74 | 141.00 | -12.00 | 569.00 | 557.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 0.95 | 1.03 | 157.50 | 2.75 | 2.93 | 142.00 | -1333.00 | 1133.00 | -200.00 | 141.00 | -11.05 | 4.46 | -0.15 | -6.74 | 142.00 | -12.00 | 469.00 | 457.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 0.25 | 0.35 | 160.00 | 4.55 | 4.80 | 143.00 | -1233.00 | 1033.00 | -200.00 | 142.00 | -11.05 | 4.46 | -0.15 | -6.74 | 143.00 | -12.00 | 369.00 | 357.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 0.03 | 0.12 | 162.50 | 6.80 | 7.35 | 144.00 | -1133.00 | 933.00 | -200.00 | 143.00 | -11.05 | 4.46 | -0.15 | -6.74 | 144.00 | -12.00 | 269.00 | 257.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 0.00 | 0.15 | 165.00 | 9.30 | 9.70 | 145.00 | -1033.00 | 833.00 | -200.00 | 144.00 | -11.05 | 4.46 | -0.15 | -6.74 | 145.00 | -12.00 | 169.00 | 157.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 146.00 | -933.00 | 733.00 | -200.00 | 145.00 | -11.05 | 4.46 | -0.15 | -6.74 | 146.00 | -12.00 | 69.00 | 57.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Visa Share Price | 3/15/19 | $155.33 | 147.00 | -833.00 | 633.00 | -200.00 | 146.00 | -10.05 | 4.46 | -0.15 | -5.74 | 147.00 | -12.00 | -31.00 | -43.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Expiration date | 3/29/19 | 148.00 | -733.00 | 533.00 | -200.00 | 147.00 | -9.05 | 4.46 | -0.15 | -4.74 | 148.00 | -12.00 | -31.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 149.00 | -633.00 | 433.00 | -200.00 | 148.00 | -8.05 | 4.46 | -0.15 | -3.74 | 149.00 | -12.00 | -31.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 150.00 | -533.00 | 333.00 | -200.00 | 149.00 | -7.05 | 4.46 | -0.15 | -2.74 | 150.00 | -12.00 | -31.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 151.00 | -433.00 | 233.00 | -200.00 | 150.00 | -6.05 | 4.46 | -0.15 | -1.74 | 151.00 | -12.00 | -31.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 152.00 | -333.00 | 133.00 | -200.00 | 151.00 | -5.05 | 4.46 | -0.15 | -0.74 | 152.00 | -12.00 | -31.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 153.00 | -233.00 | 33.00 | -200.00 | 152.00 | -4.05 | 4.46 | -0.15 | 0.26 | 153.00 | -12.00 | -31.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 154.00 | -133.00 | -67.00 | -200.00 | 153.00 | -3.05 | 4.46 | -0.15 | 1.26 | 154.00 | -12.00 | -31.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 155.00 | -33.00 | -167.00 | -200.00 | 154.00 | -2.05 | 4.46 | -0.15 | 2.26 | 155.00 | -12.00 | -31.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 156.00 | 67.00 | -167.00 | -100.00 | 155.00 | -1.05 | 4.46 | -0.15 | 3.26 | 156.00 | -12.00 | -31.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 157.00 | 167.00 | -167.00 | -0.00 | 156.00 | -0.05 | 2.46 | -0.15 | 2.26 | 157.00 | -12.00 | -31.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 158.00 | 267.00 | -167.00 | 100.00 | 157.00 | 0.95 | 0.46 | -0.15 | 1.26 | 158.00 | -12.00 | -31.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 159.00 | 367.00 | -167.00 | 200.00 | 158.00 | 1.95 | -1.54 | -0.15 | 0.26 | 159.00 | -12.00 | -31.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 160.00 | 467.00 | -167.00 | 300.00 | 159.00 | 2.95 | -3.54 | -0.15 | -0.74 | 160.00 | -12.00 | -31.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 161.00 | 567.00 | -167.00 | 400.00 | 160.00 | 3.95 | -5.54 | -0.15 | -1.74 | 161.00 | -12.00 | -31.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 162.00 | 667.00 | -167.00 | 500.00 | 161.00 | 4.95 | -7.54 | -0.15 | -2.74 | 162.00 | -12.00 | -31.00 | -43.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 163.00 | 767.00 | -167.00 | 600.00 | 162.00 | 5.95 | -9.54 | -0.15 | -3.74 | 163.00 | 38.00 | -31.00 | 7.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 164.00 | 867.00 | -167.00 | 700.00 | 163.00 | 6.95 | -11.54 | -0.15 | -4.74 | 164.00 | 138.00 | -31.00 | 107.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 165.00 | 967.00 | -167.00 | 800.00 | 164.00 | 7.95 | -13.54 | -0.15 | -5.74 | 165.00 | 238.00 | -31.00 | 207.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 166.00 | 1067.00 | -167.00 | 900.00 | 165.00 | 8.95 | -15.54 | -0.15 | -6.74 | Payoff Matrix | 166.00 | 338.00 | -31.00 | 307.00 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 167.00 | 1167.00 | -167.00 | 1000.00 | 166.00 | 9.95 | -17.54 | 0.85 | -6.74 | Stock Price Range | Payoff from Long Call K1 = $145 | Payoff from 2 Short Calls K2 = $155 | Payoff from Long Call K1 = $165 | Total Payoff | Total Profit | 167.00 | 438.00 | -31.00 | 407.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 168.00 | 1267.00 | -167.00 | 1100.00 | 167.00 | 10.95 | -19.54 | 1.85 | -6.74 | ST ≤ $145 | 0 | 0 | 0 | 0 | 0 | 168.00 | 538.00 | -31.00 | 507.00 | Payoff Matrix | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 169.00 | 1367.00 | -167.00 | 1200.00 | Payoff Matrix | 168.00 | 11.95 | -21.54 | 2.85 | -6.74 | $145 < ST ≤ $155 | ST - $145 | 0 | 0 | ST - $145 | 100(ST - $145) - $6.74 | 169.00 | 638.00 | -31.00 | 607.00 | Stock Price Range | Payoff from Long Call Option | Payoff from Long Put Option | Total Payoff | Total Profit | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 170.00 | 1467.00 | -167.00 | 1300.00 | Stock Price Range | Payoff from Long Put Option | Payoff from Sale of Stock | Total Payoff | Total Profit | 169.00 | 12.95 | -23.54 | 3.85 | -6.74 | $155 < ST < $165 | ST - $145 | 2($155 - ST) | 0 | $165 - ST | 100($165 - ST) - $6.74 | 170.00 | 738.00 | -31.00 | 707.00 | ST ≤ $147 | 0 | $147 - ST | $147 - ST | 100($147 - ST) - $43 | |||||||||||||||||||||||||||||||||||||||||||||||||
| ST ≤ $155 | $155 - ST | ST - $155.33 | $155 - $155.33 = $0.33 | 100(-$0.33) - $167 = - $200 | 170.00 | 13.95 | -25.54 | 4.85 | -6.74 | ST ≥ $165 | ST - $145 | 2($155 - ST) | ST - $165 | 0 | 0 | $147 ≤ ST ≤ $162.50 | 0 | 0 | 0 | - $43 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $155≤ ST ≤ $155.33 | 0 | ST - $155.33 | ST - $155.33 | 100(ST - $155.33) - $167 | ST ≥ $162.50 | ST - $162.50 | 0 | ST - $162.50 | 100(ST - $162.50) - $43 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ST ≥ $155.33 | 0 | ST - $155.33 | ST - $155.33 | 100(ST - $155.33) - $167 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Profit 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 -200.00000000000136 -200.00000000000136 -200.00000000000136 -200.00000000000136 -200.00000000000136 -200.00000000000136 -200.00000000000125 -200.00000000000125 -200.00000000000125 -200.00000000000125 -200.00000000000125 -200.00000000000125 -200.00000000000125 -200.00000000000125 -200.00000000000125 -200.00000000000125 -100.00000000000125 -1.2505552149377763E-12 99.999999999998749 199.99999999999875 299.99999999999875 399.99999999999875 499.99999999999875 599.99999999999875 699.99999999999875 799.99999999999875 899.99999999999864 999.99999999999864 1099.9999999999986 1199.9999999999986 1299.9999999999986
Profit from Long Call K=145 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 -11.05 -11.05 -11.05 -11.05 -11.05 -11.05 -10.050000000000001 -9.0500000000000007 -8.0500000000000007 -7.0500000000000007 -6.0500000000000007 -5.0500000000000007 -4.0500000000000007 -3.0500000000000007 -2.0500000000000007 -1.0500000000000007 -5.0000000000000711E-2 0.94999999999999929 1.9499999999999993 2.9499999999999993 3.9499999999999993 4.9499999999999993 5.9499999999999993 6.9499999999999993 7.9499999999999993 8.9499999999999993 9.9499999999999993 10.95 11.95 12.95 13.95
Profit from 2 Short Calls K=155 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 2.46 0.45999999999999996 -1.54 -3.54 -5.54 -7.54 -9.5399999999999991 -11.54 -13.54 -15.54 -17.54 -19.54 -21.54 -23.54 -25.54
Profit from Long Call K=165 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 -0.15 0.85 1.85 2.85 3.85 4.8499999999999996
Total Profit 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 -6.7400000000000011 -6.7400000000000011 -6.7400000000000011 -6.7400000000000011 -6.7400000000000011 -6.7400000000000011 -5.7400000000000011 -4.7400000000000011 -3.7400000000000007 -2.7400000000000007 -1.7400000000000007 -0.74000000000000077 0.25999999999999923 1.2599999999999993 2.2599999999999993 3.2599999999999993 2.2599999999999993 1.2599999999999993 0.25999999999999923 -0.74000000000000077 -1.7400000000000007 -2.7400000000000007 -3.7399999999999998 -4.74 -5.74 -6.74 -6.74 -6.74 -6.74 -6.74 -6.74
Profit from Long Put 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 669 569 469 369 269 169 69 -31 -31 -31 -31 -31 -31 -31 -31 -31 -31 -31 -31 -31 -31 -31 -31 -31 -31 -31 -31 -31 -31 -31 -31
Total Profit 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 657 557 457 357 257 157 57 -43 -43 -43 -43 -43 -43 -43 -43 -43 -43 -43 -43 -43 -43 -43 -43 7 107 207 307 407 507 607 707
Profit from Long Position 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 -1533.0000000000014 -1433.0000000000014 -1333.0000000000014 -1233.0000000000014 -1133.0000000000014 -1033.0000000000014 -933.00000000000125 -833.00000000000125 -733.00000000000125 -633.00000000000125 -533.00000000000125 -433.00000000000125 -333.00000000000125 -233.00000000000125 -133.00000000000125 -33.000000000001251 66.999999999998749 166.99999999999875 266.99999999999875 366.99999999999875 466.99999999999875 566.99999999999875 666.99999999999875 766.99999999999875 866.99999999999875 966.99999999999875 1066.9999999999986 1166.9999999999986 1266.9999999999986 1366.9999999999986 1466.9999999999986
Profit from Long Put 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 1333 1233 1133 1033 933 833 733 633 533 433 333 233 133 33.000000000000007 -67 -167 -167 -167 -167 -167 -167 -167 -167 -167 -167 -167 -167 -167 -167 -167 -167
Suppose instead that you believe this market will be very volatile in the near future. You do not know whether the price will go up or down, but you feel the price is about to have a big move one way or the other. Strangle A strangle is an appropriate strategy if a large movement in Visa's share price is expected, whether up or down. This involves ● Buying 1 put option with a lower strike price K1 and ● Buying 1 call option with a higher strike price K2 with the same expiration date. On the 15th March 2019, V share price stood at $155.33. The expiration date of the option contracts is 29th March 2019. To build a strangle, we: ● Buy 1 out-of-the-money put option with strike price K1 =$147 for $0.31 and ● Buy 1 out-of-the-money call option with strike price K2 = $162.50 for $0.12. A strangle generates an initial cash outflow. We have a net premium of - 100($0.31) + 100($0.12) = - $43 The profit pattern depends on how far apart the two strike prices are. The farther apart they are, the more significant the move necessary to realise a profit but the less the downside risk. The risk on the trade is limited to the net premium paid and this downside risk is less than that of a comparable straddle strategy. With a strangle combination, the profit potential is unlimited. This is because the call option has theoretically unlimited profit potential if Visa's share price increases while the put option will profit if the share price decreases by the end of the option duration. The break-even points are the put strike minus the net premium, $147 - $0.43 = $146.57 and the call strike plus the net premium $162.50 + $0.43 = $162.93. This means that the strategy will make a profit if the share price falls BELOW $146.57 or rises ABOVE $162.93. This means a percentage decrease of 5.6% or a percentage increase of 4.9% in share price is needed to realise a profit.
Profit if ST < $146.57 or ST > $162.93
Suppose you expect prices to remain stable for the period covered by the contracts above. Describe a speculative option strategy that would allow you to profit from this. Butterfly A butterfly spread is appropriate if a large stock price move is unlikely and if Visa's stock is expected to remain stable in the near term. This strategy combines a bull and bear spread with a capped risk and profit. It is designed to profit from low volatility. To create a butterfly spread: ● Buy 1 call option with a relatively low strike price K1 ● Buy 1 call option with a relatively high strike price K3 ● Sell 2 call options with a strike price K2, midway between K1 and K3 with the same time to maturity. On the 15th March 2019, V share price stood at $155.33. The expiration date of the option contracts is 29th March 2019. To set up this strategy, we: ● Buy 1 in-of-the-money call option with strike price K1 =$145 for $11.05 ● Buy 1 out-of-the-money call option with strike price K3 = $165 for $0.15 ● Sell 2 at-the-money call options with a strike price K2 = $155 for $2.23 each. A butterfly spread initially requires a small investment. We have a net premium of - 100($11.05) + 100(2)($2.23) - 100($0.15) = - $674 The potential risk associated with this strategy is limited. If Visa's stock price is below K1 = $145 on the 29th March, all of the call options are out-of-the-money and expire worthless. If Visa's stock price is above K3 = $165 on the expiration date, all of the calls are in-the-money and are exercised , which results in a net value of zero. Therefore, the maximum risk is the net premium paid of $674. A butterfly spread has a limited profit potential. This is given by the difference between K2 and K1 minus the net premium paid i.e. ($155 - $145 - $6.74) × 100 = $336. The lower break-even point is K1 plus the net premium, $145 + $6.74 = $151.74. The upper break-even point is K3 minus the net premium $165 - $6.74 = $158.26. This means that the strategy will make a profit if the share price is BETWEEN $151.74 AND $158.26. Therefore, this strategy realises a profit if Visa's share prices stays relatively close to K2 = $155.
Suppose you are bullish about this share. Describe a speculative option strategy that allows you to profit if your market expectations are correct, but protects you from large downside risk in the event that you are incorrect. Protective Put A protective put is an effective risk-management tool if a trader has a bullish perspective on a stock but wants to protect against the event of a downturn and to limit downside risk. This involves: ● Buying 1 put option with a lower strike price K near S0. ● Buying 100 shares of the underlying. On the 15th March 2019, V share price stood at $155.33. The expiration date of the option contracts is 29th March 2019. To construct a protective put, we: ● Buy 1 slightly out-of-the-money put option with strike price K =$155 for $1.67 ● Buy 100 Visa shares at $155.33 each to establish a long position. This involves an initial cash outflow. We have a net premium of - 100($1.67) + 100($155.33) = - $15700 On 29th March, the position is liquidated. If Visa's share price is less than $155, the trader exercises the put option to sell the stock for $155 per share. The loss from this is only the price paid for the put, $167. This is the maximum loss and is the known floor below which the trader won't continue to lose money. (Note that in this case, the actual maximum loss is $200, as in the payoff matrix below. This is only because of the difference between the actual stock price on 15th March and the strike price of the closest "at-the-money" put option offered.) On the other hand, if the share price rises above $155, the put option is out-of-the money and expires worthless. However the sale of the stock results in a profit as it's sold for a greater price than for which it was purchased. An increase in Visa's share price is the ideal situation and so the protective put offers unlimited profit potential. The break-even point for this strategy is $157, which is the initial stock price $155.33 plus the premium paid for the put $1.67. A protective put is also known as a synthetic long call as it resembles its risk and reward profile.
Q4 - Alibaba
| Black-Scholes Model for Alibaba Options | |||||||||
| Date | Adjusted Close | Daily Returns | B-S Model Call Option Inputs | Values | B-S Model Put Option Inputs | Values | |||
| 2/21/18 | 188.82 | 0.04% | Annualized Volatility σ (%) | 0.3591 | Annualized Volatility σ (%) | 0.3591 | |||
| 2/22/18 | 188.75 | -2.35% | |||||||
| 2/23/18 | 193.29 | -0.46% | Start Date of Contract | 21/02/2019 | Start Date of Contract | 21/02/2019 | |||
| 2/26/18 | 194.19 | 3.15% | Expiration Date of Contract | 29/03/2019 | Expiration Date of Contract | 29/03/2019 | |||
| 2/27/18 | 188.26 | 1.14% | Maturity T (yrs) | 0.0986 | Maturity T (yrs) | 0.0986 | |||
| 2/28/18 | 186.14 | 2.28% | |||||||
| 3/1/18 | 181.99 | 1.24% | Stock Price S0 | $171.76 | Stock Price S0 | $171.76 | |||
| 3/2/18 | 179.76 | -1.01% | |||||||
| 3/5/18 | 181.60 | -3.08% | Exercise Price K | $180.00 | Exercise Price K | $165.00 | |||
| 3/6/18 | 187.37 | -0.89% | |||||||
| 3/7/18 | 189.05 | 1.00% | Risk-free Rate r (%) | 2.65% | Risk-free Rate r (%) | 2.65% | |||
| 3/8/18 | 187.18 | -1.77% | |||||||
| 3/9/18 | 190.55 | -1.14% | |||||||
| 3/12/18 | 192.74 | 2.30% | B-S Model Call Option Outputs | Values | B-S Model Put Option Outputs | Values | |||
| 3/13/18 | 188.41 | -2.16% | d1 | -0.33597 | d1 | 0.43563 | |||
| 3/14/18 | 192.56 | -3.27% | |||||||
| 3/15/18 | 199.06 | -0.61% | d2 | -0.44874 | d2 | 0.32286 | |||
| 3/16/18 | 200.28 | 2.96% | |||||||
| 3/19/18 | 194.53 | -2.22% | N(d1) | 0.36845 | N(-d1) | 0.33155 | |||
| 3/20/18 | 198.95 | 1.87% | |||||||
| 3/21/18 | 195.30 | 5.77% | N(d2) | 0.32681 | N(-d2) | 0.37011 | |||
| 3/22/18 | 184.65 | 1.90% | |||||||
| 3/23/18 | 181.20 | -4.88% | Call Option Price ($) | $4.61 | Put Option Price ($) | $3.96 | |||
| 3/26/18 | 190.50 | 4.73% | |||||||
| 3/27/18 | 181.89 | 1.67% | |||||||
| 3/28/18 | 178.91 | -2.52% | |||||||
| 3/29/18 | 183.54 | 3.34% | |||||||
| 4/2/18 | 177.61 | 1.68% | |||||||
| 4/3/18 | 174.67 | 1.51% | |||||||
| 4/4/18 | 172.07 | -0.29% | |||||||
| 4/5/18 | 172.57 | 3.01% | |||||||
| 4/6/18 | 167.52 | -1.38% | |||||||
| 4/9/18 | 169.87 | -4.08% | |||||||
| 4/10/18 | 177.10 | 0.99% | |||||||
| 4/11/18 | 175.36 | -0.32% | |||||||
| 4/12/18 | 175.92 | 2.26% | |||||||
| 4/13/18 | 172.04 | -1.52% | |||||||
| 4/16/18 | 174.70 | -2.24% | |||||||
| 4/17/18 | 178.70 | -2.18% | |||||||
| 4/18/18 | 182.68 | 0.71% | |||||||
| 4/19/18 | 181.39 | 1.27% | |||||||
| 4/20/18 | 179.11 | 2.02% | |||||||
| 4/23/18 | 175.57 | 1.43% | |||||||
| 4/24/18 | 173.09 | 1.69% | |||||||
| 4/25/18 | 170.22 | -2.12% | |||||||
| 4/26/18 | 173.90 | -1.84% | |||||||
| 4/27/18 | 177.16 | -0.77% | |||||||
| 4/30/18 | 178.54 | -0.53% | |||||||
| 5/1/18 | 179.50 | -1.07% | |||||||
| 5/2/18 | 181.45 | -0.55% | |||||||
| 5/3/18 | 182.45 | -3.41% | |||||||
| 5/4/18 | 188.89 | -3.31% | |||||||
| 5/7/18 | 195.35 | -0.49% | |||||||
| 5/8/18 | 196.31 | 0.45% | |||||||
| 5/9/18 | 195.43 | -0.27% | |||||||
| 5/10/18 | 195.96 | 0.82% | |||||||
| 5/11/18 | 194.36 | -2.15% | |||||||
| 5/14/18 | 198.64 | 1.03% | |||||||
| 5/15/18 | 196.61 | -0.76% | |||||||
| 5/16/18 | 198.11 | 1.07% | |||||||
| 5/17/18 | 196.02 | 0.52% | |||||||
| 5/18/18 | 195.00 | -1.34% | |||||||
| 5/21/18 | 197.64 | 0.90% | |||||||
| 5/22/18 | 195.87 | -0.47% | |||||||
| 5/23/18 | 196.80 | -0.29% | |||||||
| 5/24/18 | 197.37 | -0.92% | |||||||
| 5/25/18 | 199.20 | 0.61% | |||||||
| 5/29/18 | 198.00 | 0.01% | |||||||
| 5/30/18 | 197.98 | -0.02% | |||||||
| 5/31/18 | 198.01 | -3.10% | |||||||
| 6/1/18 | 204.34 | -2.21% | |||||||
| 6/4/18 | 208.95 | 0.28% | |||||||
| 6/5/18 | 208.37 | 0.03% | |||||||
| 6/6/18 | 208.30 | 2.30% | |||||||
| 6/7/18 | 203.62 | -0.71% | |||||||
| 6/8/18 | 205.07 | -0.31% | |||||||
| 6/11/18 | 205.70 | -1.62% | |||||||
| 6/12/18 | 209.08 | 1.19% | |||||||
| 6/13/18 | 206.62 | -2.01% | |||||||
| 6/14/18 | 210.86 | 1.38% | |||||||
| 6/15/18 | 208.00 | -0.27% | |||||||
| 6/18/18 | 208.57 | 2.03% | |||||||
| 6/19/18 | 204.43 | -0.87% | |||||||
| 6/20/18 | 206.23 | 1.99% | |||||||
| 6/21/18 | 202.21 | 0.10% | |||||||
| 6/22/18 | 202.01 | 5.63% | |||||||
| 6/25/18 | 191.25 | -0.09% | |||||||
| 6/26/18 | 191.42 | 3.46% | |||||||
| 6/27/18 | 185.02 | -1.78% | |||||||
| 6/28/18 | 188.38 | 1.54% | |||||||
| 6/29/18 | 185.53 | -0.45% | |||||||
| 7/2/18 | 186.36 | 0.87% | |||||||
| 7/3/18 | 184.75 | -1.14% | |||||||
| 7/5/18 | 186.88 | -2.80% | |||||||
| 7/6/18 | 192.27 | -0.25% | |||||||
| 7/9/18 | 192.75 | 0.10% | |||||||
| 7/10/18 | 192.55 | 2.74% | |||||||
| 7/11/18 | 187.42 | -1.45% | |||||||
| 7/12/18 | 190.17 | 0.07% | |||||||
| 7/13/18 | 190.04 | -0.16% | |||||||
| 7/16/18 | 190.35 | -1.20% | |||||||
| 7/17/18 | 192.66 | 0.98% | |||||||
| 7/18/18 | 190.79 | 1.84% | |||||||
| 7/19/18 | 187.34 | 0.05% | |||||||
| 7/20/18 | 187.25 | 0.11% | |||||||
| 7/23/18 | 187.04 | -1.04% | |||||||
| 7/24/18 | 189.00 | -4.54% | |||||||
| 7/25/18 | 197.98 | 1.96% | |||||||
| 7/26/18 | 194.18 | 2.51% | |||||||
| 7/27/18 | 189.42 | 2.49% | |||||||
| 7/30/18 | 184.82 | -1.29% | |||||||
| 7/31/18 | 187.23 | 1.06% | |||||||
| 8/1/18 | 185.27 | 1.46% | |||||||
| 8/2/18 | 182.60 | 0.97% | |||||||
| 8/3/18 | 180.84 | 1.24% | |||||||
| 8/6/18 | 178.62 | -0.72% | |||||||
| 8/7/18 | 179.92 | 1.35% | |||||||
| 8/8/18 | 177.52 | 0.19% | |||||||
| 8/9/18 | 177.19 | -1.57% | |||||||
| 8/10/18 | 180.01 | 1.31% | |||||||
| 8/13/18 | 177.68 | 2.98% | |||||||
| 8/14/18 | 172.53 | 1.59% | |||||||
| 8/15/18 | 169.83 | -1.26% | |||||||
| 8/16/18 | 171.99 | -0.46% | |||||||
| 8/17/18 | 172.78 | -1.99% | |||||||
| 8/20/18 | 176.29 | -0.92% | |||||||
| 8/21/18 | 177.92 | 0.04% | |||||||
| 8/22/18 | 177.85 | 3.26% | |||||||
| 8/23/18 | 172.23 | -1.15% | |||||||
| 8/24/18 | 174.23 | -3.55% | |||||||
| 8/27/18 | 180.65 | 1.38% | |||||||
| 8/28/18 | 178.19 | -0.17% | |||||||
| 8/29/18 | 178.50 | 2.23% | |||||||
| 8/30/18 | 174.60 | -0.23% | |||||||
| 8/31/18 | 175.01 | 2.68% | |||||||
| 9/4/18 | 170.44 | 3.78% | |||||||
| 9/5/18 | 164.23 | 2.73% | |||||||
| 9/6/18 | 159.87 | -1.54% | |||||||
| 9/7/18 | 162.37 | 3.84% | |||||||
| 9/10/18 | 156.36 | -0.70% | |||||||
| 9/11/18 | 157.46 | -2.48% | |||||||
| 9/12/18 | 161.46 | -2.46% | |||||||
| 9/13/18 | 165.53 | 0.48% | |||||||
| 9/14/18 | 164.74 | 3.68% | |||||||
| 9/17/18 | 158.89 | 1.43% | |||||||
| 9/18/18 | 156.65 | -3.68% | |||||||
| 9/19/18 | 162.63 | -1.96% | |||||||
| 9/20/18 | 165.88 | 0.76% | |||||||
| 9/21/18 | 164.63 | 0.90% | |||||||
| 9/24/18 | 163.16 | -0.66% | |||||||
| 9/25/18 | 164.25 | -0.70% | |||||||
| 9/26/18 | 165.40 | -0.55% | |||||||
| 9/27/18 | 166.32 | 0.95% | |||||||
| 9/28/18 | 164.76 | 1.70% | |||||||
| 10/1/18 | 162.00 | 1.10% | |||||||
| 10/2/18 | 160.23 | -1.32% | |||||||
| 10/3/18 | 162.37 | 4.00% | |||||||
| 10/4/18 | 156.13 | 0.97% | |||||||
| 10/5/18 | 154.63 | 2.31% | |||||||
| 10/8/18 | 151.14 | 2.86% | |||||||
| 10/9/18 | 146.94 | 6.25% | |||||||
| 10/10/18 | 138.29 | -2.54% | |||||||
| 10/11/18 | 141.90 | -3.66% | |||||||
| 10/12/18 | 147.29 | 2.17% | |||||||
| 10/15/18 | 144.16 | -3.64% | |||||||
| 10/16/18 | 149.60 | 0.99% | |||||||
| 10/17/18 | 148.14 | 4.31% | |||||||
| 10/18/18 | 142.02 | -0.64% | |||||||
| 10/19/18 | 142.93 | -3.94% | |||||||
| 10/22/18 | 148.80 | 1.47% | |||||||
| 10/23/18 | 146.65 | 5.04% | |||||||
| 10/24/18 | 139.61 | -3.45% | |||||||
| 10/25/18 | 144.60 | 1.21% | |||||||
| 10/26/18 | 142.87 | 7.12% | |||||||
| 10/29/18 | 133.38 | -2.16% | |||||||
| 10/30/18 | 136.33 | -4.18% | |||||||
| 10/31/18 | 142.28 | -5.93% | |||||||
| 11/1/18 | 151.25 | 2.48% | |||||||
| 11/2/18 | 147.59 | 2.04% | |||||||
| 11/5/18 | 144.64 | -1.90% | |||||||
| 11/6/18 | 147.44 | -3.32% | |||||||
| 11/7/18 | 152.50 | 2.36% | |||||||
| 11/8/18 | 148.99 | 2.86% | |||||||
| 11/9/18 | 144.85 | 1.42% | |||||||
| 11/12/18 | 142.82 | -2.83% | |||||||
| 11/13/18 | 146.98 | -2.30% | |||||||
| 11/14/18 | 150.44 | -3.70% | |||||||
| 11/15/18 | 156.22 | 1.38% | |||||||
| 11/16/18 | 154.10 | 3.06% | |||||||
| 11/19/18 | 149.53 | 2.43% | |||||||
| 11/20/18 | 145.98 | -2.30% | |||||||
| 11/21/18 | 149.41 | -0.61% | |||||||
| 11/23/18 | 150.33 | -3.64% | |||||||
| 11/26/18 | 156.01 | -0.29% | |||||||
| 11/27/18 | 156.46 | -1.81% | |||||||
| 11/28/18 | 159.34 | 1.96% | |||||||
| 11/29/18 | 156.28 | -2.85% | |||||||
| 11/30/18 | 160.86 | -1.76% | |||||||
| 12/3/18 | 163.74 | 3.41% | |||||||
| 12/4/18 | 158.34 | 1.61% | |||||||
| 12/6/18 | 155.83 | 1.81% | |||||||
| 12/7/18 | 153.06 | 1.08% | |||||||
| 12/10/18 | 151.43 | -0.26% | |||||||
| 12/11/18 | 151.83 | 0.22% | |||||||
| 12/12/18 | 151.50 | 0.01% | |||||||
| 12/13/18 | 151.48 | 1.66% | |||||||
| 12/14/18 | 149.00 | 3.49% | |||||||
| 12/17/18 | 143.98 | 2.24% | |||||||
| 12/18/18 | 140.82 | 2.68% | |||||||
| 12/19/18 | 137.14 | 1.50% | |||||||
| 12/20/18 | 135.11 | 2.36% | |||||||
| 12/21/18 | 132.00 | 0.08% | |||||||
| 12/24/18 | 131.89 | -4.43% | |||||||
| 12/26/18 | 138.00 | -0.33% | |||||||
| 12/27/18 | 138.45 | -0.46% | |||||||
| 12/28/18 | 139.09 | 1.47% | |||||||
| 12/31/18 | 137.07 | 0.27% | |||||||
| 1/2/19 | 136.70 | 4.67% | |||||||
| 1/3/19 | 130.60 | -6.55% | |||||||
| 1/4/19 | 139.75 | -2.34% | |||||||
| 1/7/19 | 143.10 | -2.51% | |||||||
| 1/8/19 | 146.79 | -3.38% | |||||||
| 1/9/19 | 151.92 | 0.15% | |||||||
| 1/10/19 | 151.69 | 0.24% | |||||||
| 1/11/19 | 151.32 | 1.37% | |||||||
| 1/14/19 | 149.27 | -1.07% | |||||||
| 1/15/19 | 150.88 | -2.56% | |||||||
| 1/16/19 | 154.84 | -0.72% | |||||||
| 1/17/19 | 155.97 | -0.67% | |||||||
| 1/18/19 | 157.02 | 3.20% | |||||||
| 1/22/19 | 152.15 | 0.08% | |||||||
| 1/23/19 | 152.03 | -2.46% | |||||||
| 1/24/19 | 155.86 | -2.10% | |||||||
| 1/25/19 | 159.21 | 0.18% | |||||||
| 1/28/19 | 158.92 | 1.30% | |||||||
| 1/29/19 | 156.88 | -5.96% | |||||||
| 1/30/19 | 166.82 | -0.99% | |||||||
| 1/31/19 | 168.49 | 0.31% | |||||||
| 2/1/19 | 167.97 | 0.76% | |||||||
| 2/4/19 | 166.70 | -2.99% | |||||||
| 2/5/19 | 171.83 | 0.18% | |||||||
| 2/6/19 | 171.52 | 2.73% | |||||||
| 2/7/19 | 166.96 | -0.24% | |||||||
| 2/8/19 | 167.36 | -0.05% | |||||||
| 2/11/19 | 167.45 | -0.75% | |||||||
| 2/12/19 | 168.71 | -0.41% | |||||||
| 2/13/19 | 169.40 | 0.61% | |||||||
| 2/14/19 | 168.38 | 1.34% | |||||||
| 2/15/19 | 166.15 | -2.37% | |||||||
| 2/19/19 | 170.18 | -0.31% | |||||||
| 2/20/19 | 170.71 | -0.55% | |||||||
| 2/21/19 | 171.66 |
$180 BABA European Call Using the Black-Scholes Merton model, I calculated the price of a call option with a strike of $180 to be $4.61 on the 21st February. However, on the 18th of March, the same call option had a price of $4.75 according to Yahoo Finance. On the 18th March, BABA's current market price stood at $181.33. As underlying prices increase, the price of a call option will also increase. This is the most influential factor affecting option premiums. As well as this, the $180 call option is now in-the-money and it has intrinsic value. Intrinsic value is derived from the difference the option's strike price and the price of the underlying. As this call option is in-the-money, the option premium rises. It is worth pointing out that the reduction in time to maturity and a decline in expected volatility should lower the price of an option. However, the upward momentum of the Alibaba's share price coupled with the increased intrinsic value dominates the direction of the price of the call option. Other factors that affect the price of an option are interest rates and dividends however these have a miniscule impact.
$165 BABA European Put In the same way, I calculated the price of a put option with a strike of $165 to be $3.96 on the 21st of February. Although on the 18th March, the same put option was trading at $0.96 on Yahoo Finance. In the case of a put option, as underlying price increases, the price of a put option decreases. Moving on, the $165 put option is now even further out-of-the-money than it was when the contract began. It has no intrinsic value as the strike price isn't favourable in relation to BABA's stock price. The option premium significantly declines and tends to zero as the put is out-of-the-money. As option contacts have a finite lifespan, there are influenced by the passing of time. The time to maturity has been reduced from 36 days to 11 days. The chance of a large price movement to bring the option in-the-money diminishes and the time value of the put falls. The implied volatility given by the $165 put option on Yahoo Finance on the 18th March was 24.3%. This is considerably lower when compared to the historical volatility of 35.91% I calculated for the 21st of February. The historical volatility was the actual share price variation Alibaba experienced over the past year, while the expected volatility is the market’s consensus of future volatility. Volatility is a measure of how quickly and how rapidly a stock price swings up or down. The larger and more frequent the swings, the greater the chance that the option will eventually be in-the-money. As the expected volatility is lower than used in the model above, the put option price in turn decreases.
Q5-Facebook
| Implied Volatility of Facebook | |||||
| B-S Model Call Option Inputs | Value | B-S Model Call Option Outputs | Value | ||
| Annualized Volatility σ (%) | 22.7574% | d1 | -0.5451 | ||
| Start Date of Contract | 2/21/19 | d2 | -0.6343 | ||
| Expiration Date of Contract | 4/18/19 | ||||
| Maturity T (yrs) | 0.1534 | N(d1) | 0.2928 | ||
| Stock Price S0 | 160.64 | N(d2) | 0.2629 | ||
| Exercise Price K | 170.00 | Call Option Price ($) | 2.52 | ||
| Risk-free Rate r (%) | 2.65% | ||||
Implied Volatility of a FB European Call Option with K=$170 I used the Solver function in Excel to calculate the implied volatility taking the call option price as $2.52 while using the Black-Scholes Merton model. I deduced that the implied volatility of Facebook was 22.7574% given the price of this particular call on the 21st February. Using the CBOE Option Calculator, the implied volatility used to price the call option was 22.75%. The implied volatility of an option is the volatility for which the BSM Model price equals the market price. There is a negligible difference between the results of my calculation and the CBOE Options Calculator. This insignificant difference may be due to an approximation or rounding error on either Excel or CBOE’s part.
Implied volatility conveys the expected volatility of Facebook's stock over the life of the option. It's directly affected by the demand and supply of the underlying FB stock and by the market's expectation of the share price's direction. The demand for the option increases as expectations rise and so implied volatility also increases. Options that carry high levels of implied volatility produce high-priced option premiums as traders take into account a considerable move in the share price. There is a one-to-one correspondence between implied volatilities and option prices. While an implied volatility of approximately 22.75% for Facebook initially seems high, this is low compared to the estimated 45% volatility at the start of the end. However, since the 21st February, Facebook's implied volatility has climbed to reach 30% at the end of March.
Q6-Twitter
| i) Strangle | ii) Strap | iii) Straddle | ||||||||||||||||||||||||||||||||||||||||||
| Twitter Options | Strategy | Strike Price | Cashflow | Strategy | Strike Price | Cashflow | Strategy | Strike Price | Cashflow | |||||||||||||||||||||||||||||||||||
| Option Strike Price | Price of Call Option | Price of Put Option | Buy OTM put | 28.00 | -53.00 | Buy 2 ATM calls | 30.50 | -320.00 | Buy 1 ATM call | 30.50 | -160.00 | |||||||||||||||||||||||||||||||||
| 25.50 | 6.00 | 0.28 | Buy OTM call | 33.00 | -63.00 | Buy 1 ATM put | 30.50 | -138.00 | Buy 1 ATM put | 30.50 | -138.00 | |||||||||||||||||||||||||||||||||
| 26.00 | 7.35 | 0.30 | Initial Cashflow | -116.00 | Initial Cashflow | -458.00 | Initial Cashflow | -298.00 | ||||||||||||||||||||||||||||||||||||
| 26.50 | 6.80 | 0.35 | ||||||||||||||||||||||||||||||||||||||||||
| 27.00 | 4.25 | 0.48 | Stock Price | Profit from Long Call | Profit from Long Put | Total Profit | Stock Price | Profit from Long 2 Calls | Profit from Long Put | Total Profit | Stock Price | Profit from Long Call | Profit from Long Put | Total Profit | ||||||||||||||||||||||||||||||
| 27.50 | 3.85 | 0.56 | 20.00 | -63.00 | 747.00 | 684.00 | 20.00 | -320.00 | 912.00 | 592.00 | 20.00 | -160.00 | 912.00 | 752.00 | ||||||||||||||||||||||||||||||
| 28.00 | 3.30 | 0.53 | 20.50 | -63.00 | 697.00 | 634.00 | 20.50 | -320.00 | 862.00 | 542.00 | 20.50 | -160.00 | 862.00 | 702.00 | ||||||||||||||||||||||||||||||
| 28.50 | 2.86 | 0.63 | 21.00 | -63.00 | 647.00 | 584.00 | 21.00 | -320.00 | 812.00 | 492.00 | 21.00 | -160.00 | 812.00 | 652.00 | ||||||||||||||||||||||||||||||
| 29.00 | 2.49 | 0.78 | 21.50 | -63.00 | 597.00 | 534.00 | 21.50 | -320.00 | 762.00 | 442.00 | 21.50 | -160.00 | 762.00 | 602.00 | ||||||||||||||||||||||||||||||
| 29.50 | 2.15 | 0.94 | 22.00 | -63.00 | 547.00 | 484.00 | 22.00 | -320.00 | 712.00 | 392.00 | 22.00 | -160.00 | 712.00 | 552.00 | ||||||||||||||||||||||||||||||
| 30.00 | 1.87 | 1.17 | 22.50 | -63.00 | 497.00 | 434.00 | 22.50 | -320.00 | 662.00 | 342.00 | 22.50 | -160.00 | 662.00 | 502.00 | ||||||||||||||||||||||||||||||
| 30.50 | 1.60 | 1.38 | 23.00 | -63.00 | 447.00 | 384.00 | 23.00 | -320.00 | 612.00 | 292.00 | 23.00 | -160.00 | 612.00 | 452.00 | ||||||||||||||||||||||||||||||
| 31.00 | 1.35 | 1.63 | 23.50 | -63.00 | 397.00 | 334.00 | 23.50 | -320.00 | 562.00 | 242.00 | 23.50 | -160.00 | 562.00 | 402.00 | ||||||||||||||||||||||||||||||
| 31.50 | 1.13 | 1.95 | 24.00 | -63.00 | 347.00 | 284.00 | 24.00 | -320.00 | 512.00 | 192.00 | 24.00 | -160.00 | 512.00 | 352.00 | ||||||||||||||||||||||||||||||
| 32.00 | 0.94 | 2.37 | 24.50 | -63.00 | 297.00 | 234.00 | 24.50 | -320.00 | 462.00 | 142.00 | 24.50 | -160.00 | 462.00 | 302.00 | ||||||||||||||||||||||||||||||
| 32.50 | 0.77 | 2.61 | 25.00 | -63.00 | 247.00 | 184.00 | 25.00 | -320.00 | 412.00 | 92.00 | 25.00 | -160.00 | 412.00 | 252.00 | ||||||||||||||||||||||||||||||
| 33.00 | 0.63 | 3.05 | 25.50 | -63.00 | 197.00 | 134.00 | 25.50 | -320.00 | 362.00 | 42.00 | 25.50 | -160.00 | 362.00 | 202.00 | ||||||||||||||||||||||||||||||
| 33.50 | 0.48 | 3.40 | 26.00 | -63.00 | 147.00 | 84.00 | 26.00 | -320.00 | 312.00 | -8.00 | 26.00 | -160.00 | 312.00 | 152.00 | ||||||||||||||||||||||||||||||
| 34.00 | 0.38 | 3.90 | 26.50 | -63.00 | 97.00 | 34.00 | 26.50 | -320.00 | 262.00 | -58.00 | 26.50 | -160.00 | 262.00 | 102.00 | ||||||||||||||||||||||||||||||
| 34.50 | 0.32 | 4.35 | 27.00 | -63.00 | 47.00 | -16.00 | 27.00 | -320.00 | 212.00 | -108.00 | 27.00 | -160.00 | 212.00 | 52.00 | ||||||||||||||||||||||||||||||
| 35.00 | 0.24 | 4.75 | 27.50 | -63.00 | -3.00 | -66.00 | 27.50 | -320.00 | 162.00 | -158.00 | 27.50 | -160.00 | 162.00 | 2.00 | ||||||||||||||||||||||||||||||
| 35.50 | 0.30 | 7.10 | 28.00 | -63.00 | -53.00 | -116.00 | 28.00 | -320.00 | 112.00 | -208.00 | 28.00 | -160.00 | 112.00 | -48.00 | ||||||||||||||||||||||||||||||
| 28.50 | -63.00 | -53.00 | -116.00 | 28.50 | -320.00 | 62.00 | -258.00 | 28.50 | -160.00 | 62.00 | -98.00 | |||||||||||||||||||||||||||||||||
| Twitter Share Price | 3/1/19 | $30.62 | 29.00 | -63.00 | -53.00 | -116.00 | 29.00 | -320.00 | 12.00 | -308.00 | 29.00 | -160.00 | 12.00 | -148.00 | ||||||||||||||||||||||||||||||
| Expiration Date | 4/5/19 | 29.50 | -63.00 | -53.00 | -116.00 | 29.50 | -320.00 | -38.00 | -358.00 | 29.50 | -160.00 | -38.00 | -198.00 | |||||||||||||||||||||||||||||||
| 30.00 | -63.00 | -53.00 | -116.00 | 30.00 | -320.00 | -88.00 | -408.00 | 30.00 | -160.00 | -88.00 | -248.00 | |||||||||||||||||||||||||||||||||
| 30.50 | -63.00 | -53.00 | -116.00 | 30.50 | -320.00 | -138.00 | -458.00 | 30.50 | -160.00 | -138.00 | -298.00 | |||||||||||||||||||||||||||||||||
| 31.00 | -63.00 | -53.00 | -116.00 | 31.00 | -220.00 | -138.00 | -358.00 | 31.00 | -110.00 | -138.00 | -248.00 | |||||||||||||||||||||||||||||||||
| 31.50 | -63.00 | -53.00 | -116.00 | 31.50 | -120.00 | -138.00 | -258.00 | 31.50 | -60.00 | -138.00 | -198.00 | |||||||||||||||||||||||||||||||||
| 32.00 | -63.00 | -53.00 | -116.00 | 32.00 | -20.00 | -138.00 | -158.00 | 32.00 | -10.00 | -138.00 | -148.00 | |||||||||||||||||||||||||||||||||
| 32.50 | -63.00 | -53.00 | -116.00 | 32.50 | 80.00 | -138.00 | -58.00 | 32.50 | 40.00 | -138.00 | -98.00 | |||||||||||||||||||||||||||||||||
| 33.00 | -63.00 | -53.00 | -116.00 | 33.00 | 180.00 | -138.00 | 42.00 | 33.00 | 90.00 | -138.00 | -48.00 | |||||||||||||||||||||||||||||||||
| 33.50 | -13.00 | -53.00 | -66.00 | 33.50 | 280.00 | -138.00 | 142.00 | 33.50 | 140.00 | -138.00 | 2.00 | |||||||||||||||||||||||||||||||||
| 34.00 | 37.00 | -53.00 | -16.00 | 34.00 | 380.00 | -138.00 | 242.00 | 34.00 | 190.00 | -138.00 | 52.00 | |||||||||||||||||||||||||||||||||
| 34.50 | 87.00 | -53.00 | 34.00 | 34.50 | 480.00 | -138.00 | 342.00 | 34.50 | 240.00 | -138.00 | 102.00 | |||||||||||||||||||||||||||||||||
| 35.00 | 137.00 | -53.00 | 84.00 | 35.00 | 580.00 | -138.00 | 442.00 | 35.00 | 290.00 | -138.00 | 152.00 | |||||||||||||||||||||||||||||||||
| 35.50 | 187.00 | -53.00 | 134.00 | 35.50 | 680.00 | -138.00 | 542.00 | 35.50 | 340.00 | -138.00 | 202.00 | |||||||||||||||||||||||||||||||||
| 36.00 | 237.00 | -53.00 | 184.00 | 36.00 | 780.00 | -138.00 | 642.00 | 36.00 | 390.00 | -138.00 | 252.00 | |||||||||||||||||||||||||||||||||
| 36.50 | 287.00 | -53.00 | 234.00 | 36.50 | 880.00 | -138.00 | 742.00 | 36.50 | 440.00 | -138.00 | 302.00 | |||||||||||||||||||||||||||||||||
| 37.00 | 337.00 | -53.00 | 284.00 | 37.00 | 980.00 | -138.00 | 842.00 | 37.00 | 490.00 | -138.00 | 352.00 | |||||||||||||||||||||||||||||||||
| 37.50 | 387.00 | -53.00 | 334.00 | 37.50 | 1080.00 | -138.00 | 942.00 | 37.50 | 540.00 | -138.00 | 402.00 | |||||||||||||||||||||||||||||||||
| 38.00 | 437.00 | -53.00 | 384.00 | 38.00 | 1180.00 | -138.00 | 1042.00 | 38.00 | 590.00 | -138.00 | 452.00 | |||||||||||||||||||||||||||||||||
| 38.50 | 487.00 | -53.00 | 434.00 | 38.50 | 1280.00 | -138.00 | 1142.00 | 38.50 | 640.00 | -138.00 | 502.00 | |||||||||||||||||||||||||||||||||
| 39.00 | 537.00 | -53.00 | 484.00 | 39.00 | 1380.00 | -138.00 | 1242.00 | Payoff Matrix | 39.00 | 690.00 | -138.00 | 552.00 | ||||||||||||||||||||||||||||||||
| 39.50 | 587.00 | -53.00 | 534.00 | 39.50 | 1480.00 | -138.00 | 1342.00 | Stock Price Range | Payoff from 2 Long Call Options | Payoff from Long Put Option | Total Payoff | Total Profit | 39.50 | 740.00 | -138.00 | 602.00 | ||||||||||||||||||||||||||||
| 40.00 | 637.00 | -53.00 | 584.00 | Payoff Matrix | 40.00 | 1580.00 | -138.00 | 1442.00 | ST ≤ $30.50 | 0 | $30.50 - ST | $360 - ST | 100($30.50- ST) - $458 | 40.00 | 790.00 | -138.00 | 652.00 | |||||||||||||||||||||||||||
| 40.50 | 687.00 | -53.00 | 634.00 | Stock Price Range | Payoff from Long Call Option | Payoff from Long Put Option | Total Payoff | Total Profit | 40.50 | 1680.00 | -138.00 | 1542.00 | ST > $30.50 | 2(ST - $30.50) | 0 | ST - $360 | 100(2)(ST - $30.50) - $458 | 40.50 | 840.00 | -138.00 | 702.00 | |||||||||||||||||||||||
| 41.00 | 737.00 | -53.00 | 684.00 | ST ≤ $28 | 0 | $28 - ST | $28 - ST | 100($28- ST) - $116 | 41.00 | 1780.00 | -138.00 | 1642.00 | 41.00 | 890.00 | -138.00 | 752.00 | Payoff Matrix | |||||||||||||||||||||||||||
| $28 ≤ ST ≤ $33 | 0 | 0 | 0 | - $116 | Stock Price Range | Payoff from Long Call Option | Payoff from Long Put Option | Total Payoff | Total Profit | |||||||||||||||||||||||||||||||||||
| ST ≥ $33 | ST - $33 | 0 | ST - $33 | 100(ST - $33) - $116 | ST ≤ $30.50 | 0 | $30.50 - ST | $30.50 - ST | 100($30.50 - ST) - $298 | |||||||||||||||||||||||||||||||||||
| ST > $30.50 | ST - $30.50 | 0 | ST - $30.50 | 100(ST - $30.50) - $298 | ||||||||||||||||||||||||||||||||||||||||
Strap
Profit from Long 2 Calls 20 20.5 21 21.5 22 22.5 23 23.5 24 24.5 25 25.5 26 26.5 27 27.5 28 28.5 29 29.5 30 30.5 31 31.5 32 32.5 33 33.5 34 34.5 35 35.5 36 36.5 37 37.5 38 38.5 39 39.5 40 40.5 41 -320 -320 -320 -320 -320 -320 -320 -320 -320 -320 -320 -320 -320 -320 -320 -320 -320 -320 -320 -320 -320 -320 -220 -120 -20 80 180 280 380 480 580 680 780 880 980 1080 1180 1280 1380 1480 1580 1680 1780 Profit from Long Put 20 20.5 21 21.5 22 22.5 23 23.5 24 24.5 25 25.5 26 26.5 27 27.5 28 28.5 29 29.5 30 30.5 31 31.5 32 32.5 33 33.5 34 34.5 35 35.5 36 36.5 37 37.5 38 38.5 39 39.5 40 40.5 41 912 862 812 762 712 662 612 562 512 462 412 362 312 262 212 162 112 62 12 -38 -88 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 Total Profit 20 20.5 21 21.5 22 22.5 23 23.5 24 24.5 25 25.5 26 26.5 27 27.5 28 28.5 29 29.5 30 30.5 31 31.5 32 32.5 33 33.5 34 34.5 35 35.5 36 36.5 37 37.5 38 38.5 39 39.5 40 40.5 41 592 542 492 442 392 342 292 242 192 142 92 42 -8 -58 -108 -158 -208 -258 -308 -358 -408 -458 -358 -258 -158 -58 42 142 242 342 442 542 642 742 842 942 1042 1142 1242 1342 1442 1542 1642Straddle
Profit from Long Call 20 20.5 21 21.5 22 22.5 23 23.5 24 24.5 25 25.5 26 26.5 27 27.5 28 28.5 29 29.5 30 30.5 31 31.5 32 32.5 33 33.5 34 34.5 35 35.5 36 36.5 37 37.5 38 38.5 39 39.5 40 40.5 41 -160 -160 -160 -160 -160 -160 -160 -160 -160 -160 -160 -160 -160 -160 -160 -160 -160 -160 -160 -160 -160 -160 -110 -60 -10 40 90 140 190 240 290 340 390 440 490 540 590 640 690 740 790 840 890 Profit from Long Put 20 20.5 21 21.5 22 22.5 23 23.5 24 24.5 25 25.5 26 26.5 27 27.5 28 28.5 29 29.5 30 30.5 31 31.5 32 32.5 33 33.5 34 34.5 35 35.5 36 36.5 37 37.5 38 38.5 39 39.5 40 40.5 41 912 862 812 762 712 662 612 562 512 462 412 362 312 262 212 162 112 62 12 -38 -88 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 -138 Total Profit 20 20.5 21 21.5 22 22.5 23 23.5 24 24.5 25 25.5 26 26.5 27 27.5 28 28.5 29 29.5 30 30.5 31 31.5 32 32.5 33 33.5 34 34.5 35 35.5 36 36.5 37 37.5 38 38.5 39 39.5 40 40.5 41 752 702 652 602 552 502 452 402 352 302 252 202 152 102 52 2 -48 -98 -148 -198 -248 -298 -248 -198 -148 -98 -48 2 52 102 152 202 252 302 352 402 452 502 552 602 652 702 752Strangle
Profit from Long Call 20 20.5 21 21.5 22 22.5 23 23.5 24 24.5 25 25.5 26 26.5 27 27.5 28 28.5 29 29.5 30 30.5 31 31.5 32 32.5 33 33.5 34 34.5 35 35.5 36 36.5 37 37.5 38 38.5 39 39.5 40 40.5 41 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -63 -13 37 87 137 187 237 287 337 387 437 487 537 587 637 687 737 Profit from Long Put 20 20.5 21 21.5 22 22.5 23 23.5 24 24.5 25 25.5 26 26.5 27 27.5 28 28.5 29 29.5 30 30.5 31 31.5 32 32.5 33 33.5 34 34.5 35 35.5 36 36.5 37 37.5 38 38.5 39 39.5 40 40.5 41 747 697 647 597 547 497 447 397 347 297 247 197 147 97 47 -3 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 -53 Total Profit 20 20.5 21 21.5 22 22.5 23 23.5 24 24.5 25 25.5 26 26.5 27 27.5 28 28.5 29 29.5 30 30.5 31 31.5 32 32.5 33 33.5 34 34.5 35 35.5 36 36.5 37 37.5 38 38.5 39 39.5 40 40.5 41 684 634 584 534 484 434 384 334 284 234 184 134 84 34 -16 -66 -116 -116 -116 -116 -116 -116 -116 -116 -116 -116 -116 -66 -16 34 84 134 184 234 284 334 384 434 484 534 584 634 684Straddle A straddle is an appropriate strategy if the option trader believes that the price of the underlying asset will rise or fall significantly. This involves simultaneously buying 1 call option and 1 put option with the same strike price K and the time to maturity. On the 1st March 2019, TWTR share price was at $30.62. The expiration date of the option contracts is the 2nd April 2019. To create a straddle we ● Buy 1 at-the-money call option with strike price K = $30.50 for $1.60 ● Buy 1 at-the-money put option with strike price K = $30.50 for $1.38 A straddle involves an initial cash outflow. We have a net premium of - 100($1.60) - 100($1.38) = -$298 With this strategy, the profit potential is unlimited. The trader will profit if the price ofTwitter's shares rise or fall by an amount greater than the total cost of the premium paid. In this case, the break-even points ($30.50 - $2.98 = ) $27.52 and ($360 + $2.98 = ) $27.52. The downside risk is limited so that the maximum loss is the net premium.
Strap A trader uses a strap strategy if they are betting that there will be a large movement in the stock price and considers a rise in stock price more likely than a fall. A strap is a more bullish version of a straddle. This consists of buying 2 call options and 1 put option with the same strike price K and the time to maturity. On the 1st March 2019, TWTR share price was at $30.62. The expiration date of the option contracts is 2nd April 2019. To create a strap: ● Buy 2 at-the-money call options with strike price K = $30.50 for $1.60 each and ● Buy 1 at-money put option with strike price K = $30.60 for $1.38. A strap involves an initial cash outflow. We have a net premium of - 100(2)($1.60) - 100($1.39) = -$458 With this strategy, the profit potential is unlimited. The trader will profit if the price of Twitter's shares rise or fall by an amount greater than the total cost of the premium paid. In this case, the break-even points ($30.50 - $4.58 = ) $25.92 and ($30.50 + ($4.58/2) = ) $32.79. The downside risk is limited so that the maximum loss is the net premium.
Strangle A strangle is a good strategy if the option trader thinks that the there will be a large movement in underlying price but is unsure of the direction. This requires ● Buying 1 put option with a lower strike price K1 and ● Buying 1 call option with a higher strike price K2 with the same time to maturity. On the 1st March 2019, TWTR share price stood at $30.62. The expiration date of the option contracts is 2nd April 2019. To build a strangle, we: ● Buy 1 out-of-the-money put option with strike price K1 =$28 for $0.53 and ● Buy 1 out-of-the-money call option with strike price K2 = $33 for $0.63. A strangle generates an initial cash outflow. We have a net premium of - 100($0.53) + 100($0.63) = - $116 Once again, the profit potential is unlimited. The break-even points are the put strike minus the net premium, $28 - $1.16 = $26.849 and the call strike plus the net premium $33 + $1.16 = $34.16. The downside risk is limited to the net premium paid.
Q7-Coca Cola
| Theoretical Price of Coca Cola Options | |||||||||||||||||||
| CBOE Options Calculator | Yahoo Finance | ||||||||||||||||||
| Price of KO Call Option with K=$51 | $0.0003 | $0.03 | |||||||||||||||||
| Implied Volatility (%) | 42.69% | 37.50% | |||||||||||||||||
| Delta Δ | 0.0006 | ||||||||||||||||||
| Gamma Γ | 0.0014 | ||||||||||||||||||
| Vega ν | 0.0001 |
KO European Call Option with K=$51.00 The theoretical price of the call option with a strike price of $51.00 is $0.0003 on the 22nd of March. The option's fair value is basically zero, as calculated using the CBOE Options Calculator. This price is the estimated value of the option derived from the inputs; stock price, strike price, time to maturity, risk-free interest rate, dividends and historical volatility of the underlying. It should be emphasized that this price is purely theoretical. However, according to Yahoo Finance, the actual price of the KO option is $0.03 . This is simply the price at which the $51 KO call option is trading at in the market. It's also called the clearing price which represents the supply and demand for the option. It isn't unusual that there is a difference between the option's fair value and its premium. This discrepancy drives a lot of the trading that occurs. An option trader would consider the market value of the $51 KO call too high compared to its theoretical value and would anticipate a fall in price to reflect this over-valuation. As well as this, Yahoo Finance is now an online trading platform. Hence it is subject to the same issues that affect the prices of other trading exchanges like data filters, spreads and possible latency. Plugging the actual price $0.03 into the CBOE Calculator, Coca Cola has an implied volatility of 42.69%. This is greater than the implied volatility of 37.50%.
Delta Delta is the ratio of the change in the price of the call option to the change in the underlying stock, in this case Coca Cola. The delta of a call option always ranges from 0 and 1 because as the price of the underlying rises, the price of the call option rises. It's often used in hedging strategies as it highlights the way the option moves and it provides an insight to investing. The delta of a call option depends on whether it's in-the-money, at-the-money or out-of-the-money. The $51 KO call option is far out-of-the-money with only a week from expiration. As the expiration date approaches, the delta of an out-of-the-money call option tends to zero. This is clearly the case as the delta of the $51 KO call option is 0.0006. This means that when the strike price changes by $1, the option prices changes by $0.0006; it barely reacts to any changes in Coca Cola's price. Gamma Gamma is the rate of change of the option's delta with respect to the price of the underlying. It's the second partial derivative with respect to Coca Cola's stock price. When an option is deep in-the-money or out-of-the-money, the gamma is small and the value of gamma is at its largest when the option is at-the-money. The gamma presents a more precise picture of how delta will vary over time to changes in the underlying price because the option's delta itself is only valid for a short period of time. Here the gamma is 0.0014 which is extremely small and this means that delta changes very slowly. For example, if Coca Cola trades downwards by $1, the delta will decrease by 0.14% to 0.000516. Vega Vega is a measurement of an option's price sensitivity to a change in the volatility of the underlying stock. The vega of the $51 KO call option is 0.0001, or 0.01%, and this depicts the amount that the call price changes in relation to a change of 1% in the implied volatility of Coca Cola. As the option approaches expiry, the vega decreases. Vega has no impact on the intrinsic value of the option but it does influence the time value. A large proportion of the premium for long-date options consists of time value and this time value is greatly sensitive to changes in volatility. In this case, as there is only one week to expiry, the vega is extremely low but it's still positive.
