Seminar 4 questions
• A trader buys a European call option and sells a European put option. The options have the same underlying asset, strike price, and maturity. Describe the trader’s position. Draw the payoff profile.
• A trader buys a call option for $3 on a stock with a price of $100 and sells a call option for $1 on the same stock with a strike of $120. Both options have the same maturity and notional amount. Sketch the pay-out diagram for this position.
• What is the option strategy called?
• What is the maximum loss/gain on the position?
• What happens if the final stock price is above $120 at maturity?
• You are an investor who is long 1000 shares of Apple (AAPL)
The share price has closed for the day at $175.00:
• Draw a payoff profile detailing the profit and loss from this position as the underlying AAPL share price moves between $150 and $200
• Describe the different strategies involved in (i) a protective put and (ii) a covered call whilst keeping the same underlying AAPL share position. Under what scenarios for the AAPL share price outlook would you consider employing these strategies profitably?
• These were the latest closes for the AAPL Dec 2019 options:
Calls Strike Puts
8.15 170 2.71
5.10 175 4.63
3.00 180 7.55
Use the 175 put for a protective put strategy with your existing position and draw the resulting payoff profiles – explain your size and direction of positions.
• Which of the three strikes shown (170,175,180) are the in-the-money puts (if any) and how much intrinsic and time value do they have?