The following information relates to Questions 1 4 Mick Taylor, a recent CUNY QC graduate, is portfolio manager of a well diversified, large cap U S equity fund Recently, Taylor and his team have been overweight cash, luckily avoiding a large drawdown in the S P 500 After a near 30 decline in the headline index, Taylor is feeling more optimistic about U S equity prices However, Taylor notices that implied volatility, derived from the S P 500 options chain, remains at abnormally high levels Hence, Taylor decides to express his bullish views via index options, rather than risking the funds full cash amount by investing in individual stocks Taylor also believes the elevated levels of volatility are likely to decline during the next few months Details on the S P 500 3 month option chain are shown below The S P 500 Index is currently trading at 2785 The index multiplier is 100 1 Taylor decides to execute a bull spread using puts Taylor is most likely to Buy the 2900 strike put and sell the 2650 strike put Buy the 2650 strike put and sell the 2900stike put Buy the 2900 strike put and sell 3000 strike put 2 To take advantage of his view that implied volatility is likely to fall during the next several months, Taylor is most likely to Sell the 2785 call and buy the 2785 put Sell the 2785 call and sell the 2785 put Buy the 2785 call and buy the 2785 put 3 If Taylor bought the 2650 call and sold 2900 call, Taylor would have Unlimited upside potential and limited downside Limited upside potential and unlimited downside potential Limited upside potential and limited downside potential 4 If Taylor sold the 2785 strike straddle, and at expiration, the S P 500 closed at 2700, the profit and loss per option contact is closest to $8,500 Gain $8,500 Loss $27,010 Gain Calls Strike 2575 2650 2785 2900 3000 $Bid 308 4 253 8 164 9 101 6 58 5 $Ask 312 7 285 2 167 9 103 9 60 7 Implied Vol 4127 3931 3510 3164 2874 Delta 6955 6411 5259 4073 2948 Open Intertest 8,183 10,264 2,857 47,984 51,659 Puts Strike 2575 2650 2785 2900 3000 $Bid 104 9 125 2 170 2 221 0 277 6 SAsk 106 9 127 3 172 8 224 6 281 6 Implied Vol 4048 3840 3439 3087 2785 Delta 3019 3564 4745 5959 712 Open Intertest 13,023 32,573 2,099 47,741 48,256 Calls Strike 2575 2650 2785 2900 3000 $Bid 308 4 253 8 164 9 101 6 58 5 $Ask 312 7 285 2 167 9 103 9 60 7 Implied Vol 4127 3931 3510 3164 2874 Delta 6955 6411 5259 4073 2948 Open Intertest 8,183 10,264 2,857 47,984 51,659 Puts Strike 2575 2650 2785 2900 3000 $Bid 104 9 125 2 170 2 221 0 277 6 SAsk 106 9 127 3 172 8 224 6 281 6 Implied Vol 4048 3840 3439 3087 2785 Delta 3019 3564 4745 5959 712 Open Intertest 13,023 32,573 2,099 47,741 48,256

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The following information relates to Questions 1-4. Mick Taylor, a recent CUNY QC graduate, is portfolio manager of a well-diversified, large-cap U.S. equity fund. Recently,

The following information relates to Questions 1-4. Mick Taylor, a recent CUNY QC graduate, is portfolio manager of a well-diversified, large-cap U.S. equity fund. Recently, Taylor and his team have been overweight cash, luckily avoiding a large drawdown in the S&P 500. After a near 30% decline in the headline index, Taylor is feeling more optimistic about U.S. equity prices. However, Taylor notices that implied volatility, derived from the S&P 500 options chain, remains at abnormally high levels. Hence, Taylor decides to express his bullish views via index options, rather than risking the funds full cash amount by investing in individual stocks. Taylor also believes the elevated levels of volatility are likely to decline during the next few months.

Details on the S&P 500 3-month option chain are shown below. The S&P 500 Index is currently trading at 2785. The index multiplier is 100.

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1. Taylor decides to execute a bull spread using puts. Taylor is most likely to

Buy the 2900 strike put and sell the 2650 strike put
Buy the 2650 strike put and sell the 2900stike put
Buy the 2900 strike put and sell 3000 strike put

2. To take advantage of his view that implied volatility is likely to fall during the next several months, Taylor is most likely to

Sell the 2785 call and buy the 2785 put
Sell the 2785 call and sell the 2785 put
Buy the 2785 call and buy the 2785 put

3. If Taylor bought the 2650 call and sold 2900 call, Taylor would have

Unlimited upside potential and limited downside
Limited upside potential and unlimited downside potential
Limited upside potential and limited downside potential

4. If Taylor sold the 2785 strike straddle, and at expiration, the S&P 500 closed at 2700, the profit and loss per option contact is closest to

$8,500 Gain
$8,500 Loss
$27,010 Gain

Calls Strike 2575 2650 2785 2900 3000 $Bid 308.4 253.8 164.9 101.6 58.5 $Ask 312.7 285.2 167.9 103.9 60.7 Implied Vol 4127 .3931 .3510 .3164 .2874 Delta .6955 .6411 .5259 4073 .2948 Open Intertest 8,183 10,264 2,857 47,984 51,659 Puts Strike 2575 2650 2785 2900 3000 $Bid 104.9 125.2 170.2 221.0 277.6 SAsk 106.9 127.3 172.8 224.6 281.6 Implied Vol 4048 .3840 .3439 .3087 .2785 Delta -.3019 -.3564 -.4745 -.5959 -.712 Open Intertest 13,023 32,573 2,099 47,741 48,256 Calls Strike 2575 2650 2785 2900 3000 $Bid 308.4 253.8 164.9 101.6 58.5 $Ask 312.7 285.2 167.9 103.9 60.7 Implied Vol 4127 .3931 .3510 .3164 .2874 Delta .6955 .6411 .5259 4073 .2948 Open Intertest 8,183 10,264 2,857 47,984 51,659 Puts Strike 2575 2650 2785 2900 3000 $Bid 104.9 125.2 170.2 221.0 277.6 SAsk 106.9 127.3 172.8 224.6 281.6 Implied Vol 4048 .3840 .3439 .3087 .2785 Delta -.3019 -.3564 -.4745 -.5959 -.712 Open Intertest 13,023 32,573 2,099 47,741 48,256