Premium Essay

Options

In: Business and Management

Submitted By ShengyuZhang
Words 1137
Pages 5
Dear Professor Bhattacharya,

This is our written brief of case 1. As we misunderstood the instructions of question 5, we tried again to finish the problem properly. We just didn’t want to miss the great opportunity to practice our knowledge of the class so we worked on it independently. Thank you so much for your time and understanding.

Best regards,

Xiaolin Li, Shengyu Zhang, Riley David and Strick Jacob

CASE 1 BY GROUP 1
Xiaolin Li, Shengyu Zhang, Riley David and Strick Jacob

QUESTION 1
#1: Buying Calls * If ST < $55, we won’t exercise the call, and lose the premium of$2.875; * If ST > $55, we will exercise the call and the net profit will be ST - $55 - $2.875 = ST - $57.875

#2: Writing Calls * If ST < $55, the call buyer will not exercise the call, thus we earn the premium of $2.875; * If ST > $55, the call buyer will exercise the call and our net profit is $2.875 + $55 – ST = $57.875 - ST

#3: Buying Puts

* When ST > $55, we won’t exercise the put and will lose the premium of $2.625; * When ST < $55, we begin to earn money ($55 - ST – $2.625)

#4: Writing Puts

* When ST > $55, keep our premium of $2.625; * When ST < $55, need to purchase the stock, payoff is ST - $55 + 2.625

QUESTION 2
• Which one of the strategies offers the greatest upside return?
Buying calls since it can provide infinite profit as stock price grows.

• Which one of the strategies offers the least upside returns?
Writing puts because the most you can earn is your premium and premium of puts is lower than that of calls.

• Which one of the strategies offers the greatest downside potential?
Writing calls since when stock price reaches really high, your potential loss is infinite.

• Which one of the strategies offers the least downside potential?
Buying puts because the most you can lose is…...

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