You and your friend Wil Wheaton are both very bullish on Tesla and, hence, decide to purchase Tesla shares at the current price of $66 per share. Given your very positive views on Tesla's stock price over the next few months, you and Wil also decide to write 6-month at-the-money put options on Tesla, and you are able to do so at a premium of $1.75 per contract. Each option contract is for one share of Tesla. Wil, though is even more bullish than you are and decides to short five puts for each share of Tesla he purchases. You, on the other hand, are happy with writing two puts for each share you buy. a) Produce a diagram showing profits and losses for Wil's strategy and for yours as a function of Tesla's stock price at the expiration of the options. Please, label the diagram in detail. b) Are the strategies that you and Wil are implementing consistent with the expectations indicated above? c) Comment on the relative appeal of the two strategies if, contrary to what you and Wil predict, Tesla's stock price experiences a large downward movement in the coming six months. What are the breakeven points for you and for Wil? NOTE: For parts a) and c) of this question you are allowed to use a spreadsheet. If you do use a spreadsheet, please provide a screenshot of the Excel file showing your answers. Please include the screenshot in the PDF file you submit, do NOT submit a separate file. You and your friend Wil Wheaton are both very bullish on Tesla and, hence, decide to purchase Tesla shares at the current price of $66 per share. Given your very positive views on Tesla's stock price over the next few months, you and Wil also decide to write 6-month at-the-money put options on Tesla, and you are able to do so at a premium of $1.75 per contract. Each option contract is for one share of Tesla. Wil, though is even more bullish than you are and decides to short five puts for each share of Tesla he purchases. You, on the other hand, are happy with writing two puts for each share you buy. a) Produce a diagram showing profits and losses for Wil's strategy and for yours as a function of Tesla's stock price at the expiration of the options. Please, label the diagram in detail. b) Are the strategies that you and Wil are implementing consistent with the expectations indicated above? c) Comment on the relative appeal of the two strategies if, contrary to what you and Wil predict, Tesla's stock price experiences a large downward movement in the coming six months. What are the breakeven points for you and for Wil? NOTE: For parts a) and c) of this question you are allowed to use a spreadsheet. If you do use a spreadsheet, please provide a screenshot of the Excel file showing your answers. Please include the screenshot in the PDF file you submit, do NOT submit a separate file
