Why Do Nike-Bear Spread?
1.) Before we started working on our spreads we had some initial thoughts about which stocks might best fit the different strategies and their purposes. Our bets and assumptions were based on the company’s current situation and some external factors that we thought might influence the stock prices for an up- or down-move. The following are the stocks we used for the different spreads:
Starbucks - Bear spread
Nike - Bull spread
Pfizer - Butterfly, Straddle & Strangle
For Starbucks we bet on down-move from the stock, which at that time (March 11th) had a 4-month average price of $75.23 and a current price of $75.03. We built a Bear Put Spread with a long position on 77.5-strike put and a short position in a 70-strike put. We …show more content…
We wanted to bet on very low volatility and make a profit from very low fluctuations from Pfizer stock. Our Butterfly spread consisted on shorting two 32-strike calls and taking a long position on 31-strike and 33-strike calls. The center strike price of our butterfly was the exercise price of the Straddle and also lied exactly in the middle of the $31.5-strike put and $32.5-strike call for our Strangle. In the end, our Butterfly spread turned out to be unsuccessful, because the price of Pfizer finished outside the parameters we planned for our spread (see Graph …show more content…
Our initial position to hedge both strategies was long the shares of both companies. For Facebook we used the stop-loss strategy and set arbitrary times to check our positions and hedge it. The initial cash inflow of shorting these options was $35,500 and the cost of hedging this position went up to $174,312.51. On the other hand, with the Google options we used the delta-hedge strategy and checked the stock price 3 times a day. The initial cash inflow from shorting the calls was $54,000 and the costs related to hedging reached a total of $1,089,842.53. The amount spent for hedging the FB shares was 5 times larger than the value of the options we sold, while for Google the ratio was 20 to 1. After seeing these figures we can observe that hedging strategies are extremely costly, but are essential to protect short positions against risk and prevent higher
Starbucks - Bear spread
Nike - Bull spread
Pfizer - Butterfly, Straddle & Strangle
For Starbucks we bet on down-move from the stock, which at that time (March 11th) had a 4-month average price of $75.23 and a current price of $75.03. We built a Bear Put Spread with a long position on 77.5-strike put and a short position in a 70-strike put. We …show more content…
We wanted to bet on very low volatility and make a profit from very low fluctuations from Pfizer stock. Our Butterfly spread consisted on shorting two 32-strike calls and taking a long position on 31-strike and 33-strike calls. The center strike price of our butterfly was the exercise price of the Straddle and also lied exactly in the middle of the $31.5-strike put and $32.5-strike call for our Strangle. In the end, our Butterfly spread turned out to be unsuccessful, because the price of Pfizer finished outside the parameters we planned for our spread (see Graph …show more content…
Our initial position to hedge both strategies was long the shares of both companies. For Facebook we used the stop-loss strategy and set arbitrary times to check our positions and hedge it. The initial cash inflow of shorting these options was $35,500 and the cost of hedging this position went up to $174,312.51. On the other hand, with the Google options we used the delta-hedge strategy and checked the stock price 3 times a day. The initial cash inflow from shorting the calls was $54,000 and the costs related to hedging reached a total of $1,089,842.53. The amount spent for hedging the FB shares was 5 times larger than the value of the options we sold, while for Google the ratio was 20 to 1. After seeing these figures we can observe that hedging strategies are extremely costly, but are essential to protect short positions against risk and prevent higher