FNCE30007 Chapter Notes - Chapter 11: Straddle, Bear Spread, Covered Call

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orangemole587

29 Jun 2020

School

University of Melbourne

Department

Finance

Course

FNCE30007

Professor

Federico Nardari

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Document Summary

Buying a covered call = short position in a stock + long position in a call option. Protective put = long position in a stock + long position in a put option. Reverse protective put = short position in a stock + short position in a put option. Strategies involving a single option and a stock: Writing a covered call = long position in a stock + short position in a call option. Bull spread = buy a call option and sell a call option on the same stock with a higher strike price. One call is in the money, the other call is out of the money. Bull spread = buy a put option and sell a put option on the same stock with a higher strike price. Bear spread = buy a put option and sell a put option on the same stock with a lower strike price. Box spread = bull call spread + bear put spread.

Related Questions

An investor executed an arbitrage trade three month ago by selling a protective put and buying a fiduciary call. At expiration, the stock price was below the same strike price of the call and put options involved in the trade.

At expiration, to close out all positions, the investor will:

A	receive a bond payoff, buy stock via the call option, and deliver the stock to settle a short stock position.

B	receive a bond payoff, buy stock via the put option, and deliver the stock to settle a short stock position.

C	sell stock via the call option, and then take proceeds from stock sale to pay off the risk-free loan.

D	sell stock via the put option, and then take proceeds from stock sale to pay off the risk-free loan.

Consider this Put option. P= $40, X=45, D=0.80, U=1.2 Risk free Rate: 3%. T= 6months
a-) If you hold one put option today, inidicate whether you need to buy or short and how many shares of stock in order to completely hedge the risk in the long put position in next quarter i.e work for one quarter from now? (Hint: Use the binomial/ construct trees)
b-) What is today's delta with same maturity and expecise price (X) and written on the same stock as the put option from part (a) (Hint: Use put-call)
c-) How will calculate in (a) change if put is American. Dont draw trees, Just indicate.
d-) Consider long Starddle position constructed from Euro put from part (a) and european call option on XYZ Stock with same strike price and maturity. What is the annualized continously compunded expected return on the straddle over next quarter, between now and quarter from now? Assume XYZ stock has an expected continously compunded rate of 10% per year

taupepanda191

Many individual investors employ a "buy-and-write" investment strategy that involves a long stock position and short call position. You implement the strategy by buying a stock at price $19.05 and writing a call with strike of $22.50 and option price of $3.20 . In one year you receive the stock's annual dividend of $0.75 and, furthermore, suppose the stock price has increased 20%. Find the rate of return for this buy-and-write strategy.

	a.	42.4%
	b.	56.5%
	c.	62.1%
	d.	51.4%
	e.	46.7%

please show working out!!

FNCE30007 Chapter Notes - Chapter 11: Straddle, Bear Spread, Covered Call

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