505 505 Problem 4: Options Short Answers (5 points) (a) Imagine AAPL stock closed at $520 on November 15th. At the same time, the following options were traded for AAPL stock: Call or put Expiration date Strike price Option premium Call December 21st $26.50 Put December 21st $13.30 Assuming AAPL's share price is $560 on December 21st, compute the payoff, profit, and return for a straddle (a portfolio of one call and one put) with strike price 505 purchased at market close on November 15th. As a reminder, the payoff from an options portfolio is the total value of the underly- ing options at expiration (ignoring the premiums paid), the profit is the payoff minus the premiums paid, and the return equals the profit divided by the initial premium. Payoff Long 1 straddle Position Profit Return (b) Say you were short Google stock in your portfolio but wanted to limit your losses to 25% of the amount your shorted. What option trade should you make (circle one of buy or sell, and one of put or call)? Buy / Sell Google put / call options. (c) Say you worked at Company A and found that Company B has stock returns most strongly correlated with Company A's of all publicly traded firms. If you wanted to hedge the risk of being fired from Company A because the company peforms poorly, what option trade should you make in Company B's options? Buy / Sell Company B put / call options