1a. On a recent day, May Facebook 62 put option was selling for $2.50. Draw a hockey stick diagram for a short position in the Facebook 62 put. Carefully show and label all relevant points on the diagram and the correct numbers associated with those points.

1B

If the May Facebook 59 call is selling for $1.25, and the Facebook 60 call is selling for $.75, construct a bear spread using these nearby 59 and 60 calls.

Question 2

2a. Construct a table like the one from lecture (Slide 59, April 27) showing profit and loss if the options expire when the stock price is $0, $58, $59, $60, $61, $65, and $70, for each part of the spread, and the net profit or loss for the entire spread position.

Question 3 20 pts

Upload

2b. Draw and upload a hockey stick diagram for the spread, clearly labeling all the critical points.

Question 3 Introduction

(3 parts, 40 Points total)

Consider a short straddle constructed from options on 3M stock which have an expiration date of June 17, 2016 (the third Friday in June).

The following table displays the only possible prices of 3M stock on June 17, as well as the payoffs accruing to someone who holds a short straddle on the stock:

Stock price $80 $90 $100 $110 $120

Gain from short strangle -$10 $0 $10 $0 -$10

Question 4 20 pts

3a. A short straddle is created using two options. For each option in the short straddle above, indicate whether it is a put or a call, whether it is bought or sold, and what its strike price is. What is the maximum possible loss on this short straddle? What is the maximum possible loss on a real short straddle?

Explain your answer to all of the above questions.

Question 5

3b. What is the sum of the premiums of the options you identified in part (a)?

Explain.

Question 6

3c. Why would someone enter into a short straddle?

Explain carefully.