Submission 9

Week8 Ch 20: 5,11,15

5. Turn back to figure 20.1, which lists prices of various IBM options. Use the data in the figure to calculate the payoff and the profits for investments in each of the following February expiration options, assuming that the stock price on the expiration date is $195.
a. Call option, X = $190.
b. Put option, X =$190.
c. Call option, X = $195.
d. Put option, X =$195.
e. Call option, X = $200.
f. Put option, X =$200.

St =$195

COST
PAYOFF
PROFIT
CALL
6.75
195-190=5
-1.75
PUT
3
0
-3
CALL
3.65
0
-3.65
PUT
5
0
-5
CALL
1.61
0
-1.61
PUT
8.09
5
-3.09

11. holding 5,000 shares of stock, currently selling at $40 / share. ready to sell but prefer to put off the sale until next yr for tax reasons.
If you continue to hold the shares until January, however, face the risk that the stock will drop in value b4 yr-end.
You decide to use a collar to limit downside risk without laying out a good deal of additional funds.
January call options with a strike of $35 are selling at $2, and January puts with a strike price of $45 are selling at $3. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at: (a) $30,
(b) $40, or
(c) $50?
Compare these proceeds to what you would realize if you simply continued to hold the shares.
5000 shares, sell @ $40/share. Call option with Xc=$35, selling @ $2
Put option with XP = $45, selling @ $3
So, Value of portfolio:

St =30
= 40
=50
STOCK
150000
40*5000
50*5000
write a call
0; 2*5000
-5*5000; 10,000
-15*5000;10,000
buy a put
75000; -3*5000
25000;-15000
0;-15000 total 220,000
195,000
170,000

holding shares:

15. Joseph Jones, a manager @ CSI, received 10,000 shares of company stock as part of his compensation package. The stock currently sells at $40 /share. Joseph would like to defer selling the stock until the next tax year.
In January, however, he will need to sell all his holdings to provide for a down pmt on his new house. Joseph is worried about the price risk involved in keeping his shares. At current prices, he would receive $400,000 for the stock.
If the value of stock holdings falls below $350,000, his ability to come up with the necessary down payment would be jeopardized.
On the other hand, if the stock value rises to $450,000, he would be able to maintain a small cash reserve even after making the down payment.
Joseph considers 3 investment strategies:
a. Strategy A is to write Jan call options on the CSI shares with strike price $45. These calls are currently selling for $3 each.

b. Strategy B is to buy January put options on CSI with strike price $35. These options also sell for $3 each.

c. Strategy C is to establish a zero-cost collar by writing the January calls and buying the January puts.
Evaluate each of 3 strategies with respect to Joseph’s invmt goals. What are the advantages and disadvantages of each? Which would you recommend?

a.

St <45
St > 45
STOCK
S*10,000
S*10,000
write a call
0; +30,000
-(S-45)*10,000; +30,000 buy a put
10,000*S+30,000
480,000 Subject to substantial downside loss
b.

St <35
St > 35
STOCK
S*10,000
S*10,000
buy a put
(35-S)*10,000; -30,000
0; -30,000 buy a put
320,000
10,000*S-30,000

c.

St <35
35<S<45
S>45
STOCK
S*10,000
S*10,000
S*10,000 write a call
0; +30,000
0; +30,000
-(S-45)*10,000;30,000
buy a put
(35-S)*10,000; -30,000
0;-30,000
0;-30000 total 350,000
S*10,000
450,000
Recommendation: c >b>c

Additional q:
You are managing a share portfolio for a LT investor YUK.
YUK willing to invest in shares that hv strong growth prospects and is NOT concerned abt income.

TLS hv been range trading at around $15.
TLS – mining Co., excellent prospects over the LT but ST growth are limited. So believe that the share will continue to range trade for next 6~12 months.
Not paying dividend, unlikely to pay.
3 month risk free rate 4% p.a. convertible quarterly and at-the-money put options quoted at $0.70.

a) at what Price would you expect a 3 month at-the-money- call option to be quoted?