13 PS 7
MGMT E-2000
Fall, 2014
Problem Set 7
(Due Tuesday, Dec. 2)
1. (20 pts)
On a recent day, Microsoft stock (symbol: MSFT) was at $25. Assume the nearby MSFT 25 call was selling for $1. Draw a hockey stick diagram for a long position in the MSFT 25 call.
2. (40 pts)
If the MSFT 24 call is selling for $2.50, and the MSFT 25 call is selling for $1, construct a bull spread using these nearby 24 and 25 calls.
a. (20 pts)
Construct a table like the ones we did in class showing profit and loss at relevant stock prices for each part of the spread, and the net profit or loss for the entire spread position.
b. (20 pts)
Draw a hockey stick diagram for the spread, clearly labeling all the critical points.
3. (40 pts)
Consider a “long strangle” constructed from options which have an expiration date of January 16, 2015 (the third Friday in January). The following table displays the possible prices of Boeing stock on January 16, as well as the payoffs accruing to someone who holds a long strangle on Boeing stock:
Probability 0.2 0.3 0.2 0.2 0.1 Stock price $80 $90 $100 $110 $120 Gain from $15 $5 $0 $10 $20 long strangle
a. (10 pts)
What will it cost an investor to buy a long strangle today?
b. (20 pts)
A long strangle is created using two options. For each option in the strangle above, indicate whether it is a put or a call, whether it is bought or sold, and calculate what its strike price is. Explain your answer.
c. (10 pts)
Why would someone buy a long strangle? Explain carefully.
Fall, 2014
Problem Set 7
(Due Tuesday, Dec. 2)
1. (20 pts)
On a recent day, Microsoft stock (symbol: MSFT) was at $25. Assume the nearby MSFT 25 call was selling for $1. Draw a hockey stick diagram for a long position in the MSFT 25 call.
2. (40 pts)
If the MSFT 24 call is selling for $2.50, and the MSFT 25 call is selling for $1, construct a bull spread using these nearby 24 and 25 calls.
a. (20 pts)
Construct a table like the ones we did in class showing profit and loss at relevant stock prices for each part of the spread, and the net profit or loss for the entire spread position.
b. (20 pts)
Draw a hockey stick diagram for the spread, clearly labeling all the critical points.
3. (40 pts)
Consider a “long strangle” constructed from options which have an expiration date of January 16, 2015 (the third Friday in January). The following table displays the possible prices of Boeing stock on January 16, as well as the payoffs accruing to someone who holds a long strangle on Boeing stock:
Probability 0.2 0.3 0.2 0.2 0.1 Stock price $80 $90 $100 $110 $120 Gain from $15 $5 $0 $10 $20 long strangle
a. (10 pts)
What will it cost an investor to buy a long strangle today?
b. (20 pts)
A long strangle is created using two options. For each option in the strangle above, indicate whether it is a put or a call, whether it is bought or sold, and calculate what its strike price is. Explain your answer.
c. (10 pts)
Why would someone buy a long strangle? Explain carefully.