Question 2 (Trading Strategies Involving Options) - (35 Marks) Part A (30 Marks) You are considering a Butterfly strategy in which you believe the underlying stock price will stay at $60 for a certain period of time. You have the following call options available to you: Strike Prices of $50, $60 and $70 with each option priced at $22, $15 and $10 respectively You have the following put options available to you: Strike Prices of $50, $60 and $70 with each option priced at $11.50, $14.40 and $19.30 respectively All options are European with 1 year to maturity. The risk free rate is 1% (continuous compounding). 1. Create your strategy using only call options. What option position(s) would you make? Draw the payoff and profit diagrams. Clearly label your charts. What range of stock prices would this strategy be profitable? 2. Create your strategy using only put options. What option position(s) would you make? Draw the payoff and profit diagrams. Clearly label your charts. What range of stock prices would this strategy be profitable? 3. Create an Iron Butterfly (i.e. using calls and puts). What option position(s) would you make? Draw the payoff and profit diagrams. Clearly label your charts. What range of stock prices would this strategy be profitable? 4. Given these three methods to create a Butterfly, explain why you would choose one method over the other. Pick a call and a put option with the same strike price. Compare these prices using put-call parity. Do these prices make sense? Please show your calculations. Part B (5 Marks) A trader is considering a Condor strategy instead of a Butterfly. Identify one advantage and one disadvantage a Condor strategy has compared to a Butterfly. Draw a payoff diagram for the Condor and illustrate how you would create this. (Note: Part B is separate from Part A) Question 2 (Trading Strategies Involving Options) - (35 Marks) Part A (30 Marks) You are considering a Butterfly strategy in which you believe the underlying stock price will stay at $60 for a certain period of time. You have the following call options available to you: Strike Prices of $50, $60 and $70 with each option priced at $22, $15 and $10 respectively You have the following put options available to you: Strike Prices of $50, $60 and $70 with each option priced at $11.50, $14.40 and $19.30 respectively All options are European with 1 year to maturity. The risk free rate is 1% (continuous compounding). 1. Create your strategy using only call options. What option position(s) would you make? Draw the payoff and profit diagrams. Clearly label your charts. What range of stock prices would this strategy be profitable? 2. Create your strategy using only put options. What option position(s) would you make? Draw the payoff and profit diagrams. Clearly label your charts. What range of stock prices would this strategy be profitable? 3. Create an Iron Butterfly (i.e. using calls and puts). What option position(s) would you make? Draw the payoff and profit diagrams. Clearly label your charts. What range of stock prices would this strategy be profitable? 4. Given these three methods to create a Butterfly, explain why you would choose one method over the other. Pick a call and a put option with the same strike price. Compare these prices using put-call parity. Do these prices make sense? Please show your calculations. Part B (5 Marks) A trader is considering a Condor strategy instead of a Butterfly. Identify one advantage and one disadvantage a Condor strategy has compared to a Butterfly. Draw a payoff diagram for the Condor and illustrate how you would create this. (Note: Part B is separate from Part A)
