Reference no: EM132428727

Problem: A stock is trading at a price of $24.67. You also have the following information on the prices of options that trade on this stock, where all options expire in 6 months.

Strike Call Put

20.00 5.15 0.17

22.50 3.18 0.66

25.00 1.73 1.67

27.50 0.83 3.24

30.00 0.36 5.22

Consider the following trading strategies:

-Buy a call option with a strike of 25 and short a put with a strike of 25

-Buy a call option with a strike of 25 and write-a call with a strike of 27.50

-Buy a put option with a strike of 20, buy a put option with a strike of 30, write-a put with a strike of 22.5 and write-a put with a strike of 27.50

Let ST represent the value of the underlying asset at expiration.

Question 1: Plot the payos, or construct the payo table, of each of the three strategies as a function of ST

Question 2: For what values of ST does each trading strategy yield a positive payo? Give the range of values for each of the strategies. For what range do the trading strategies yield a positive prot (taking into account the cost of the position)? For the purposes of answering this question, you may ignore the opportunity cost of funds.

Question 3: Which of the strategies would you call bullish? Which would you call bearish? Which would be a low volatility trade?