In stocks, what is an option strategy?
Option strategy involves buying or selling of more than 1
options to minimize risks and maximize returns. This
involves buying or selling a call or put option and clubbing them
together. To take benefit of rising stocks call options can ensure
high profits and to minimize losses in case of falling prices of
stocks put options can really help.
Example of such option strategy is long straddle :In case the
investor thinks there will be large increase or fall in share price
without knowing the direction of movement of share then he
purchases call and put option with same expiration date and same
strike price. This hedges against large fluctuations in share
price.
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A long straddle is an option strategy in which the investor buys a call option and a put option with the same strike price and the same expiration date. If the strike is $40/share and the premiums for the call and the put are $4/share and $3/share respectively. Draw the profit loss diagram for the long straddle strategy. Repeat problem 1 for a short straddle (i.e. write a call and write a put).
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Consider an option strategy where the investor simultaneously buys one call with an exercise price of $120 and sells one call with an exercise price of $110 both with the same expiration date. Calculate the payoff of the strategy when spot price of the underlying is less than $110, between $110 and $120, and greater than $120 at expiration. Draw a payoff diagram for this strategy. What is the bet being made with this strategy?
Write the Black-Scholes option price formula for non dividend paying stocks.
Consider an option strategy where the investor simultaneously buys one call with an exercise price of $100, sells two calls with an exercise price of $110 and buys one call with an exercise price of $120 all with the same expiration date. Calculate the payoff of the strategy when spot price of the underlying is less than $100, between $100 and $110, between $110 and $120, and greater than $120 at expiration. Draw a payoff diagram for this strategy. What...
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An investment strategy restricts the portfolio to a mix of two stocks A and B with the following price/share and annual returns: Stock Price/Share Annual Return A $35 5% B $45 7% Rank R1: Obtain an annual return of at least 6%. Rank R2: Limit the investment in stock B to no more than 55% of the total investment. Assume X1 = dollar amount allocated to stock A, and X2 = dollar amount allocated to stock B. What...