Answer the questions step by step -
Q1. You been asked to describe the outcome of an option strategy by a client. The best way to do this is through a profit profile. The following portfolio is what needs to be described:
Buy 1000 Shares of Pep Boys (PBY) at 12
Buy 15 December 10 Strike Price Puts @1.25
Write (Sell) 10 December 8.5 Calls @5.25
Create a profit profile for the strategy.
2. A stock is trading at $100 per share and a 95-strike price three-month call has a premium of $7.25 and a three-month put with the same strike price has a premium of $.35. If the current 3-month T-bill rate is .90%, is there an arbitrage and how can you take advantage of it. How much is to be gained?
Q3. The yield curve is flat and the yield is .80%. A call option with a strike price of 65 on the Fox Stock, which is currently trading at $62.00, is trading for $1.50. A put option with the same expiration and strike price is trading at $4.21. What is the time to expiration of the two options?
Q4. You have been asked to describe the following portfolio of stock and option by making a profit profile for the strategy.
Sell Short 1000 Shares of TWTR $28.00
Buy 5 January 25 TWDR calls @ $5.25
Buy 5 January 30 TWDR calls @$.80
Sell 10 January 30 TWDR Puts @$2.71
