Reference no: EM132432898
Problem: A stock is trading at a price of $24.67. You also have the following information on the prices of options that trade on this stock, where all options expire in 6 months.
Strike Call Put
20.00 5.15 0.17
22.50 3.18 0.66
25.00 1.73 1.67
27.50 0.83 3.24
30.00 0.36 5.22
Consider the following trading strategies:
-Buy a call option with a strike of 25 and short a put with a strike of 25
-Buy a call option with a strike of 25 and write-a call with a strike of 27.50
-Buy a put option with a strike of 20, buy a put option with a strike of 30, write-a put with a strike of 22.5 and write-a put with a strike of 27.50
Let ST represent the value of the underlying asset at expiration.
Question 1: Plot the payos, or construct the payo table, of each of the three strategies as a function of ST
Question 2: For what values of ST does each trading strategy yield a positive payo? Give the range of values for each of the strategies. For what range do the trading strategies yield a positive prot (taking into account the cost of the position)? For the purposes of answering this question, you may ignore the opportunity cost of funds.
Question 3: Which of the strategies would you call bullish? Which would you call bearish? Which would be a low volatility trade?
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