Question

Financial Economics Problem

Option Strategies

1. As a Trader, you expect something to happen to the stock price of NetFlix… Anything could happen. How can you profit from such a strategy by buying 1 call option and 1 put option? Assume that the strike prices of the options are equal. Be very precise with your axis and very carefully label your graphs on the Y-axis (profit).

2. Modify your graph such that the strike price of your call and put options are not equal. Be very precise with your axis and very carefully label your graphs on the Y-axis (profit). This is a challenge question. Hint… relate to 5 (a)(iii) above.

Hint: Problem 5(a)(iii) can be seen below:

iii. Strike Price - Compare the option price of an option with a strike price higher than current spot versus an option with a strike price set at the current spot price (current spot price is your starting point).

Answer 1

	Assume Strike Price =$360
	Assume cost of buying one option=$3
	Net Cost of buying one Call and one Put Option=$3+$3=$6
	Assume price at expiration =S
	Payoff for buying 1 call option at strike price=$360
	If S< or =360, Payoff =$0
	If S>360, Payoff =(S-360)
	Payoff for buying 1 Put option at strike price=$360
	If S> or =360, Payoff =$0
	If S<360, Payoff =(360-S)
	S	A	B	C	D=A+B+C
	Price at expiration	Payoff Call Option	Payoff Put Option	Cost of premium	Net Profit
	$330	$0	$30	($6)	$24
	$335	$0	$25	($6)	$19
	$340	$0	$20	($6)	$14
	$345	$0	$15	($6)	$9
	$350	$0	$10	($6)	$4
	$355	$0	$5	($6)	($1)
	$360	$0	$0	($6)	($6)
	$365	$5	$0	($6)	($1)
	$370	$10	$0	($6)	$4
	$375	$15	$0	($6)	$9
	$380	$20	$0	($6)	$14
	$385	$25	$0	($6)	$19
	$390	$30	$0	($6)	$24
	Assume CallOption Strike Price=$362
	Assume Put Option Strike Price=$358
	Assume, Cost of one option =$1
	Total Cost=$1+$1=$2
	S	A	B	C	D=A+B+C
	Price at expiration	Payoff Call Option	Payoff Put Option	Cost of premium	Net Profit for unequal strike
	$330	$0	$28	($2)	$26
	$335	$0	$23	($2)	$21
	$340	$0	$18	($2)	$16
	$345	$0	$13	($2)	$11
	$350	$0	$8	($2)	$6
	$355	$0	$3	($2)	$1
	$358	$0	$0	($2)	($2)
	$360	$0	$0	($2)	($2)
	$362	$0	$0	($2)	($2)
	$365	$3	$0	($2)	$1
	$370	$8	$0	($2)	$6
	$375	$13	$0	($2)	$11
	$380	$18	$0	($2)	$16
	$385	$23	$0	($2)	$21
	$390	$28	$0	($2)	$26
					$35 $30 $25 $20 $15 Payoff Call Option Payoff Put Option $10 Cost of premium Net Profit S5 S0 320 $330 $340 $350 $360 $370 $380 $390 $400 ($5) ($10) $30 $25 $20 Payoff Call Option $15 Payoff Put Option Cost of premium 510 Net Profit for unequal strike $5 $0 $320 $330 $400 ($5)