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An investor anticipates an event three months from today that will sharply increase the future volatility of WireGrass Companies but expects the stock to be
An investor anticipates an event three months from today that will sharply increase the future volatility of WireGrass Companies but expects the stock to be flat in the meantime. The broader market does not anticipate the event and the consensus is for Wiregrass to trade relatively flat. The current price of WireGrass stock is $75 per share and the following put options are available: a. If the investor wishes to create a calendar spread to profit from their non-consensus view using 5 contracts (100 shares each) of each contract, what trades are necessary and what is the cost of the position? (1 point) b. After three months, put option #1 is at expiration and put option #2 has 180 days remaining until expiration. What is the profit/loss on the calendar spread if: i. The price of WireGrass stock is still $75 and the forward-looking volatility has increased, causing the remaining put option to trade at 11.67. (1 point) ii. The price of WireGrass stock is $60 and the expected increase in implied volatility did not happen, causing the remaining put to trade at 16.08. (1 point) An investor anticipates an event three months from today that will sharply increase the future volatility of WireGrass Companies but expects the stock to be flat in the meantime. The broader market does not anticipate the event and the consensus is for Wiregrass to trade relatively flat. The current price of WireGrass stock is $75 per share and the following put options are available: a. If the investor wishes to create a calendar spread to profit from their non-consensus view using 5 contracts (100 shares each) of each contract, what trades are necessary and what is the cost of the position? (1 point) b. After three months, put option #1 is at expiration and put option #2 has 180 days remaining until expiration. What is the profit/loss on the calendar spread if: i. The price of WireGrass stock is still $75 and the forward-looking volatility has increased, causing the remaining put option to trade at 11.67. (1 point) ii. The price of WireGrass stock is $60 and the expected increase in implied volatility did not happen, causing the remaining put to trade at 16.08. (1 point)
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