Reference no: EM13950137
Please read the following short article from the Wall Street Journal before answering the questions:
Options traders were quick to take positions in Research In Motion Ltd. after the BlackBerry maker said fourth-quarter earnings were likely to come in at the lower end of projections.
Early in the day, one trader backed out of a bullish "call spread" -- selling June $55 calls and buying June $70 calls -- and then covered a short position in June $35 puts. Generally speaking, the position would have yielded profits had Research In Motion climbed above $55.
After buying shares in RIM, this investor appears to have pursued a "collar," buying January $40 puts and selling January $60 calls. Priced at $1.05.
Still other investors appeared to be making a play on future volatility, with one trader speculating that RIM shares trade in a range. This trader appears to have sold a "strangle" in January 2010 contracts, selling equal numbers of January $40 puts and January $60 calls. Collecting $15.45.
The company is scheduled to report fourth-quarter numbers April 2. While some investors might have been caught offguard, the options market appears to have turned bearish on the stock over the past several weeks. A month ago, calls outnumbered puts by more than two to one. As of yesterday, that ratio had slipped, and calls outnumbered puts by just 1.3 to one.
What does the ratio of the number of calls over the number of puts usually indicate?
Assuming you bought RIM’s stock at the price of $50 per share, please draw a payoff diagram and a profit diagram for the ‘collar’ mentioned in this article. You need to give the values of key points on your diagram.
Please draw a payoff diagram and a profit diagram for selling the ‘strangle’ mentioned in this article. You need to give the values of key points on your diagram.
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