Question

1)

a) Shaun owns one share of X Stock which is currently trading at $150. He thinks that X stock will appreciate over the next year, but wants to protect himself from possible losses. He then decides to write a one-year call option on X stock with a strike price of $165, which he sells for a $10 premium. He immediately uses the $10 to purchase a one-year put option on X stock with a strike price of $150. Plot the profit of this strategy, including the stock value and options, as a function of X stock price in one year. Show the Excel sheet with labels.

b) Explain in words what Shaun is accomplishing by using this strategy. What are the pros and cons?

Answer 1

15:36. 0.06 кв/S 89 G 1 Assume that stock price varles from $100 t0 $200 at an interval of S5 Premium paid Stock price 2 Exercise/Lapse (Pu) Put oplien value Exercise/Lapse (Call) Premium receive Call option value 3 100 10 Exercise 40 Lapse 10 10 4 105 10 Exercise 35 Lapse 10 10 110 10 Exercise 30 Lapse 10 10 115 10 Exercise 25 Lapse 10 10 20 Lapse 120 10 Екеrcise 10 10 15 Lapse 125 10 Exercise 10 10 130 10 Exerclse 10 Lapse 10 10 5 Lapse 10 135 10 Exercise 10 10 140 10 Exercise 0 Lapse 10 10 -10 Lapse 12 145 10 Exercise 10 10 10 Exercis 13 150 -10 Lepse 10 10 10 Lapse 14 155 10 Lapse 10 10 15 160 10 Lapse 10 Lapse 10 10 10 Lapse 10 Lapse -10 Lapse 14 155 10 10 17. 170 -10 Exercise 10 5 0 10 Exercise 1 175 10 Lapse 10 Lapse 10 -10 Exercise 19 180 10 -5 -10 20 185 10 Lapse 10 Lapse 10 Lapse 10 Exercise 10 21 -19 Еxсreisе 10 15 190 195 10 Exercise 10 -20 23 200 10 Lapse -10 Exercise 10 -25 24 25 27 28 2 31 32 и 35 36 и 39 40 41 42 5 57 53 54 7 6 62 Sheet1 +

The holder of a put option exercises if the Strike price is more than Spot price, otherwise lapses.

Profit of put option (if holder exercises)= Strike price- Spot price- Premium paid.

Loss of put option (if holder lapses)= Premium paid.

The holder of a Call option exercises if the Strike price is less than Spot price, otherwise lapses.

Loss of call option writing (if holder exercises)= Spot price- Strike price+ Premium received.

Profit of call option writing(if holder lapses)= Premium received.

Total profit= Call option value + put option value

B) By using this strategy Shaun can make more profits if the price of the stock is below $165. If the share price is more than $165 he will incur loss due loss of put option holding & call option writing.