Question
Aline Nues is a junior analyst in the derivatives research division of an international securities firm. Nuess supervisor, Ctia Pereira, asks her to conduct an
Aline Nues is a junior analyst in the derivatives research division of an international securities firm. Nuess supervisor, Ctia Pereira, asks her to conduct an analysis of various options trading strategies relating to shares of three companies: IZD, QWY, and XDF. On 1 February, Nues gathers selected option premium data on the companies, which is presented in Exhibit 1.
Exhibit 1.Share Price and Options Premiums as of 1 February (share prices and option premiums are in euros)
| Share Price | Call Premium | Option Date/Strike | Put Premium |
| 9.45 | April/87.50 | 1.67 | |
IZD | 93.93 | 2.67 | April/95.00 | 4.49 |
| 1.68 | April/97.50 | 5.78 | |
| ||||
| 4.77 | April/24.00 | 0.35 | |
QWY | 28.49 | 3.96 | April/25.00 | 0.50 |
| 0.32 | April/31.00 | 3.00 | |
| ||||
| 0.23 | February/80.00 | 5.52 | |
XDF | 74.98 | 2.54 | April/75.00 | 3.22 |
| 2.47 | December/80.00 | 9.73 | |
Nues considers the following option strategies relating to IZD.
Strategy 1 | Constructing a synthetic long put position in IZD |
Strategy 2 | Buying 100 shares of IZD and writing the April 95.00 strike call option on IZD |
Strategy 3 | Implementing a covered call position in IZD using the April 97.50 strike option |
Nues next reviews the following option strategies relating to QWY.
Strategy 4 | Implementing a protective put position in QWY using the April 25.00 strike option |
Strategy 5 | Buying 100 shares of QWY, buying the April 24.00 strike put option, and writing the April 31.00 strike call option |
Strategy 6 | Implementing a bear spread in QWY using the April 25.00 and April 31.00 strike options |
Finally, Nues considers two option strategies relating to XDF.
Strategy 7 | Writing both the April 75.00 strike call option and the April 75.00 strike put option on XDF |
Strategy 8 | Writing the February 80.00 strike call option and buying the December 80.00 strike call option on XDF |
Over the past few months, Nues and Pereira have followed news reports on a proposed merger between XDF and one of its competitors. A government antitrust committee is currently reviewing the potential merger. Pereira expects the share price to move sharply up or down depending on whether the committee decides to approve or reject the merger next week.
Pereira asks Nues to recommend an option trade that might allow the firm to benefit from a significant move in the XDF share price regardless of the direction of the move.
- Based on Exhibit 1, the maximum gain per share that could be earned if Strategy 7 is implemented is:
- 5.74.
- 5.76.
- unlimited.
- Based on Exhibit 1, the best explanation for Nues to implement Strategy 8 would be that, between the February and December expiration dates, she expects the share price of XDF to:
- decrease.
- remain unchanged.
- increase.
- The option trade that Nues should recommend relating to the government committees decision is a:
- collar.
- bull spread.
- long straddle.
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