Question

The goal of this project is to examine option trading strategies. The project requires you to work in Excel with the provided spreadsheet.

A) Bull Spread Payoff

Long call option K1 =

Short call option K2 =

Stock Price (ST) Total Payoff

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

$50.00

$55.00

$60.00

A) Consider buying a call option with a strike of $20 and a selling call option with strike of $30. Fill in the table for the payoffs of the bull spread (6 points)

C) Consider selling a put option with a strike of $20 and buying a put option with a strike of $30. Fill in the table for the payoffs of the bear spread (6 points)

E) Consider buying a call option with a strike of $20 and selling a put option with a strike of $20. Consider buying a put option with a strike of $30 and selling a call option with a strike of $30. Fill in the table for the payoffs of the box spread (6 points)

G) Consider buying a call and a put option, both with a strike price of $20 and the same expiration. Fill in the table for the payoffs of the straddle (6 points)

Answer 1

Bull Spread	=	Buy at lower strike price and sale at higher strike price
Call Option	=	Buying call option exercised only when stock price remains higher than strike price.
		Selling of call option is obligation and seller's profit position remains till the stock price remains lower than strike price.
Premium	=	In call Option premium requires to be paid hence it is additional Cost.
	=	On sell on an option seller get premium.
In question no amount of premium provided hence not considered for solution
Bull Spread
S.No.	Stock Price	Value of Call Option		Net pay off Other than premium
		Buy @ 20	Sell @30
A	B	C	D	E=C+D
1	0	0	0	0
2	5	0	0	0
3	10	0	0	0
4	15	0	0	0
5	20	0	0	0
6	25	5	0	5
7	30	10	0	10
8	35	15	-5	10
9	40	20	-10	10
10	45	25	-15	10
11	50	30	-20	10
12	55	35	-25	10
13	60	40	-30	10
Bear Spread	=	It includes buy a put option and selling a put on same time but at lower strike price.
Put Option	=	Buy a put option means having right to sale underlying stock at predetermine price even stock price remains lower than strike price.
		Sell a put option means obligation to sale at contracted price even stock price remains higher in market.
S.No.	Stock Price	Value of Put Option		Net pay off Other than premium
		Buy @ 30	Sale @ 20
A	B	C	D	E=C+D
1	0	30	-20	10
2	5	25	-15	10
3	10	20	-10	10
4	15	15	-5	10
5	20	10	0	10
6	25	5	0	5
7	30	0	0	0
8	35	0	0	0
9	40	0	0	0
10	45	0	0	0
11	50	0	0	0
12	55	0	0	0
13	60	0	0	0
Box Spread	=	It is combination of buying Bull Spread and subsequently matching with sale of Bear Spread.
Box Value at Expiration		=	Higher Strike Price-Lower Strike Price
S.No.	Stock Price
		Buy @ 20	Sell @30	Buy @ 30	Sale @ 20	Net
A	B
1	0	0	0	30	-20	10
2	5	0	0	25	-15	10
3	10	0	0	20	-10	10
4	15	0	0	15	-5	10
5	20	0	0	10	0	10
6	25	5	0	5	0	10
7	30	10	30	0	0	40
8	35	15	30	0	0	45
9	40	20	30	0	0	50
10	45	25	30	0	0	55
11	50	30	30	0	0	60
12	55	35	30	0	0	65
13	60	40	30	0	0	70
G	Buy a call and put option @20
S.No.	Stock Price	Value of Buy		Net pay off Other than premium
		Buy @ 20	Put @20
A	B	C	D	E=C+D
1	0	0	20	20
2	5	0	15	15
3	10	0	10	10
4	15	0	5	5
5	20	0	0	0
6	25	5	0	5
7	30	10	0	10
8	35	15	0	15
9	40	20	0	20
10	45	25	0	25
11	50	30	0	30
12	55	35	0	35
13	60	40	0	40