ADMS 1000 Lecture Notes - Lecture 27: Straddle, Call Option

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blushweasel304

6 Jul 2018

School

York University

Department

Administrative Studies

Course

ADMS 1000

Professor

Alan Shapiro

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ADMS 1000 Full Course Notes

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Constructing a short straddle in a foreign currency involves selling (taking a short position in) both a call option and a put option for that currency. The higher break-even point is equal to the strike price plus both premiums. The resulting contingency graph is shown in exhibit 5b. 2. A short straddle in a foreign currency involves selling (taking a short position in) both a call option and a put option for that currency. As in a long straddle, the call and put option have the same expiration date and strike price. The advantage of a short straddle is that it provides the option writer with income from two separate options. The disadvantage is the possibility of substantial losses if the underlying currency moves substantially away from the strike price. A short straddle results in a worksheet and a contingency graph that are exactly opposite to those of a long straddle.

Related Questions

Assume you create a portfolio that consists of a long position in one 9 month call option and a short position in one 9 month put option on euros. Both the call and the put have 100,000 euros attached. The strike price for the call and put options is $1.3 and $1.4, respectively. The call and put premium is $.04 and $.03, respectively.

Calculate the profit/loss (in terms of USD) on your portfolio if the spot rate is .8 euros per dollar when the options expire. Round intermediate steps to four decimals and your final answer to two decimals. Do not use currency symbols or words when entering your response.

fuchsiaantelope817

The spot price of an asset is $2,500. The European call option on the asset with strike price $2,400 that expires in 6 months is traded at $225. The asset will pay a dividend in 3 months of $200. The default free 3-month pure discount bond is traded at $98 and the 6-month pure discount bond is traded at $95, both with face value $100. There is also a forward contract and a European put option on the asset with the same strike price as the call, both expiring in 6 months.

Answer the following:

(a) What should the forward price be and why?

(b) What should the price of the put option be?

(d) Suppose that there are no 6-month pure discount bonds. How can you borrow synthetically over 6 months and at what interest rate if the put option is traded at $205?

(e) Plot the profit diagram and compute lhe break-even point(s) of the strategy that goes long the asset and goes short two call options on the asset.

(f) PIot the payoff diagram ofthe strategy that goes long one call and one put option on the asset. This strategy can be considered a speculation on what?

Here is a quote from an investment website about an investment strategy using options:

One strategy investors are applying to the XYZ options is using âsynthetic stock.â A synthetic stock is created when an investor simultaneously purchases a call option and sells a put option on the same stock. The end result is that the synthetic stock has the same value, in terms of capital gain potential, as the underlying stock itself. Provided the premiums on the options are the same, they cancel each other out so the transaction fees are a wash. (as cited in McDonald, 2013, question 3.19)

Suppose, to be concrete that the premium on the call you buy is the same as the premium on the put you sell, and both have the same strikes and times to expiration.

a. What can you say about the strike price?

b. What term best describes the position you have created? What is the shape of the profit diagram?

c. Suppose the options have a bid-ask spread. If you are creating a synthetic purchased stock and the net premium is zero inclusive of the bid-ask spread, where will the strike price be relative to the forward price?

d.If you create a synthetic short stock with zero premium inclusive of the bid-ask spread, where will the strike price be relative to the forward price?

e. Do you consider the âtransaction feesâ to really be âa washâ? Why or why not?

champagnezebra235

ADMS 1000 Lecture Notes - Lecture 27: Straddle, Call Option

ADMS 1000 Full Course Notes

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