Use the information in the table to answer the following questions. Create one spread per question from the prices in the chart. Create only one option spread for each question. For example if you were going to create a covered write you might want to buy 100 shares at $91 and write a May 100 call against it. Please use a different option than the example.
| Calls |
|
|
Puts |
|
| May-85 |
$7.50 |
|
May-85 |
$1.50 |
| May-90 |
$4.20 |
|
May-90 |
$3.10 |
| May-95 |
$1.90 |
|
May-95 |
$5.90 |
| May 100 |
$0.70 |
|
May 100 |
$9.80
|
Create a vertical spread
a. What is your maximum profit? At what point do you reach the maximum profit? What happens as the stock increases in value?
b. What is your maximum loss? At what point do you reach the maximum loss? What happens if the stock continues to decrease in value?
c. Compare a covered write to a vertical spread. What is the difference in return? What is the difference in risk?
d. Is this a low or high volatility spread? What does volatility mean?