A client came to you asking for your advice to create an option strategy that will provide the payoff structure using certain options on Teslas stock. The options should expire in 1 month. The payoff structure and the required type of options will be determined for each group separately and is available on LMS in the Final Project folder.

Your task is to create a strategy that meets the clients needs using a combination of the options as specified in the payoff structure file for your group.

i) Explain how your client can create the required strategy using options (i.e., what is the mix of options you need for this strategy).

ii) Using a five-step binomial tree approach and showing the inputs you used in your calculation, calculate this strategys cost (or net premium received). Assume the rf is 1.5% with quarterly compounding. Refer to the CME to obtain Teslas implied volatility.

iii) Draw the payoff and profit (loss) diagram. iv) Basedonthepricesyoucalculatedfortheoptions,atwhatprice(orprices)oftheunderlying

stock will the strategy breakeven? v) What assumptions did the client make that motivates the creation of this strategy?

The client approached you to advise him on how to create the following payoff structure using put options: (Hint: check how the bear spread is created [note: this is NOT a bear spread])