Assume you have the following 3 month options on XYZ available, where So=$52.00: Call, K=$50.00 Call, K=$52.00 Call, K=$54.00 Put, K=$50.00 Put, K=$52.00 Put, K=$54.00 You wish to create a directional exposure to XYZ. You believe that the current price will rise moderately over the next 3 months, to around $54.00. If the market falls, you wish to limit your losses. Using just two of the above call options, you can construct a strategy that will maximise your profit by buying a $50.00 call and selling a $54.00 call . Alternatively, by using just two of the above call options, you can construct a less risky, less profitable strategy that still suits your view b y? a ? and selling a ?
Question
Assume you have the following 3 month options on XYZ available, where So=$52.00:
Call, K=52.00 Call, K=$54.00
Put, K=52.00 Put, K=$54.00
You wish to create a directional exposure to XYZ. You believe that the current price will rise moderately over the next 3 months, to around $54.00. If the market falls, you wish to limit your losses.
Using just two of the above call options, you can construct a strategy that will maximise your profit by buying a 54.00 call .
Alternatively, by using just two of the above call options, you can construct a less risky, less profitable strategy that still suits your view b y? a ? and selling a ?
Solution
If you want to construct a less risky, less profitable strategy that still suits your view, you can use a bull call spread strategy. This strategy involves buying a call option at a certain strike price and selling another call option at a higher strike price.
In this case, you can buy a 54.00 call. This strategy will still profit if the price rises as you expect, but the potential profit is capped at the difference between the two strike prices. The risk is also limited to the net premium paid for the options. This strategy is less risky because the premium received from selling the 52.00 call, reducing your net investment and risk.
Similar Questions
Assume you have the following 3 month options (and their premiums) on XYZ available, where So = $52.00: Call, K=$50.00, premium=$5.00 Call, K=$52.00, premium=$4.00 Call, K=$54.00, premium=$3.00 Put, K=$50.00, premium=$3.00 Put, K=$52.00, premium=$4.00 Put, K=$54.00, premium=$5.00 You construct a short $50.00/$52.00 strangle. If the underlying price at expiry is $60.00, what is the gain/loss on your strategy? (Note: Please show a loss as a negative number)
Forecast the direction (up or down) for theUSD/CNY pair’s price in two months, providing a point estimate to 2 decimal places. (ii) In no more than 250 words, explain the factors considered in forming your forecast and why these are considered to be both relevant and pivotal.
A lender, concerned that its cost of funds might rise during the term of a loan it has made, can hedge this rise without forgoing the chance to profit by a decline in the cost of funds. This is done by: Question 5Select one:a.buying call options on Treasury billsb.selling futures contracts on Treasury billsc.buying futures contracts on Treasury billsd.buying put options on Treasury bills
Consider the following ways of protecting a stock portfolio against price declines. Short 3-month forward contract. Buying at-the-money 3-month put option for cash. Buying and selling an out-of-the-money 3-month put and call option. Compare these strategies and include what the specific initial cost and expiration date payoff potential would be for each strategy over the next 3 months. In response to peers, provide feedback on the strategies discussed.
How can call options and put options be used to reduce risk? State at least 2 conditions.
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.