Question
Question 2 Your parents want to try option products to protect their position and increase their gains. Assume they bought a stock at $175 on
Question 2
Your parents want to try option products to protect their position and increase their gains. Assume they bought a stock at $175 on 1 January. Equity research analysts give it an equal chance to be at $177 or $250 by 1 March. You consider the following options offered by a broker: A call with an exercise price of $185 and a premium of $15. A put with an exercise price of$145 and a premium of $15.
You explain two possible option strategies based on this offer: a covered call or a protective put.
(a) Illustrate which of the two option strategies is generally for protection and which is to make gains. (6 marks)
(b) Determine the pay-off and the profit realised on the covered call and protective put strategies under each of the two price scenarios by 1 March. (10 marks)
(c) Appraise the effectiveness of a straddle and a butterfly option spread strategy in the scenario where the share price stays at its initial level of $175. (9 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started