Reference no: EM132301344

Question. The table on the EXCEL sheet shows the prices of call and puts at different strike prices of options on Alphabet Inc. (GOOG) on March 15, 2019. The expiration of all options are same - September 20, 2019. The market price of the GOOG stock on March 15, 2019 is $1,185.55. Remember to make buy /sell decisions of options based on bid/ask prices (not last prices).

Answer the following:
1. a) Write down the profit equation for a long call bull spread.

Equation:

b) What are the payoff, cost and profit of a long call bull spread with strike prices of $1,125 and 1,240 if the GOOG share price become $1,210.55 on the expiration date?

Payoff:

Cost:

Profit:

c) What are the payoff, cost and profit of a long put bear spread with strike prices of $1,125 and 1,240 if the GOOG share price become $1,210.55 on the expiration date?

Payoff:

Cost:

Profit:

d) Calculate the payoff, cost and profit form a long box spread based on (b) and (c). What strategy is better (call bull/put bear/box)? Explain.

Payoff:

Cost:

Profit:

Which strategy& why?:

2. (a) If you feel that Stock price can go up to $1,400 or can go down to $1,000, but you aren't sure about the direction, what strategy would be more appropriate when you choose options with strike price of 1,220. Calculate the payoff and profit of the strategy.

Strategy:

Payoff:

Profit:

(b) At what stock price(s) your profit would be zero in the above case.

(c) If you expect stock price is more likely to go up to $1,400, what strategy would better serve you? Calculate payoff and profit of the strategy.

Payoff:

Profit:

(d) Calculate the range of stock prices beyond which your profit would be positive if you follow the strategy in (c)?