Problem 1 - An investor writes a put with a premium p = $1.40 and a strike price, X = $35. The current market price of the stock is $37.50. Given the following stock prices at expiration date, calculate
(1) The payoff of the put without considering put premium.
(2) Net profit after considering the put premium. Fill in the following table for (1) and (2). No need to show your calculations here.
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ST
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X
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P
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Payoff w/o p
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π
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0
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30
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|
|
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100
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|
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(3) Draw/sketch the net profit (π) diagram. The graph paper is in the last page. But you do not have to use it to draw/sketch the diagram (Note that the investor does NOT buy the underlying asset).
(4) Write down the math equation for the net profit of writing this put.
(5) What is the breakeven price of ST for the writer?
(6) What is the maximum loss for the writer?
(7) What is the maximum profit for the writer?
You can either use graph or math equation (or use them both) to do (5), (6), and (7).
Problem 2 - The following information is available for calls options on the stock of UNH (United health Group Incorporated) priced at $50.
A call for CL0 = $6.84 with a strike price of XL = $45.
A call for CH0 = $3.82 with a state price of XH = $50.
You want to set up a bull call spread strategy using the above two calls.
(1) What are your actions? Please fill in the blank with the correct answer.
_________ (buy or sell?) a call with strike of $45 and _________ (buy or sell?) a call with strike of $50.
(2) How much will these actions cost? (Hint: only consider premiums)
(3) Briefly explain the intuition/rationale behind your actions.
(4) Scratch the payoff diagram of this trading strategy.
(5) Write down the payoff equations for this trading strategy.
(6) Calculate the maximum profit of this trading strategy.
(7) Calculate the maximum loss of this trading strategy.
(8) What is the profit if the stock price at expiration is $47?
(9) (Challenging question) what is the breakeven stock price?