Investment and Portfolio Management
TOPIC 9 – TUTORIAL 9
1. Look at this Figure 20, which lists prices of various IBM options. Use the data in the figure to
calculate the payoff and the profits for investments in each of the following August expiration
options, assuming that the stock price on the expiration date is $150.
a. Call option, X = $145.
b. Put option, X = $145.
c. Call option, X = $150.
d. Put option, X = $150.
e. Call option, X = $155.
f. Put option, X = $155.
2. Suppose you think Apple stock is going to appreciate substantially in value in the next year.
Say the stock’s current price, S0, is $100, and a call option expiring in one year has an exercise
price, X, of $100 and is selling at a price, C, of $10. With $10,000 to invest, you are considering
three alternatives.
a. Invest all $10,000 in the stock, buying 100 shares.
b. Invest all $10,000 in 1,000 options (10 contracts).
c. Buy 100 options (one contract) for $1,000, and invest the remaining $9,000 in a money market
fund paying 4% annual interest.
What is your rate of return for each alternative for the following four stock prices in one year?
Summarize your results in the table and diagram below.
Investment and Portfolio Management
3. You are a portfolio manager who uses options positions to customize the risk profile of your
clients. In each case, what strategy is best given your client’s objective?
a. Performance to date: Up 16%.
Client objective: Earn at least 15%.
Your scenario: Good chance of large gains or large losses between now and end of year.
i. Long straddle.
ii. Long bullish spread.
iii. Short straddle.
b. Performance to date: Up 16%
Client objective: Earn at least 15%.
Your scenario: Good chance of large losses between now and end of year.
i. Long put options.
ii. Short call options.
iii. Long call options.
Investment and Portfolio Management
4. An investor purchases a stock for $38 and a put for $.50 with a strike price of $35. The inves-
tor sells a call for $.50 with a strike price of $40. What is the maximum profit and loss for this
position? Draw the profit and loss diagram for this strategy as a function of the stock price at
expiration.
5. A FinCorp put option with strike price 60 trading on the Acme options exchange sells for $2.
To your amazement, a FinCorp put with the same maturity selling on the Apex options
exchange but with strike price 62 also sells for $2. If you plan to hold the options positions to
expiration, devise a zero-net-investment arbitrage strategy to exploit the pricing anomaly.
Draw the profit diagram at expiration for your position.
Extra Exercises:
1. Consider a bullish spread option strategy using a call option with a $25 exercise price priced
at $4 and a call option with a $40 exercise price priced at $2.50. If the price of the stock
increases to $50 at expiration and each option is exercised on the expiration date, the net profit
per share at expiration (ignoring transaction costs) is:
i. $8.50
ii. $13.50
iii. $16.50
iv. $23.50
2. A put on XYZ stock with a strike price of $40 is priced at $2.00 per share, while a call with a
strike price of $40 is priced at $3.50. What is the maximum per-share loss to the writer of the
uncovered put and the maximum per-share gain to the writer of the uncov- ered call?
Maximum Loss to Maximum Gain
Put Writer to Call Writer
i.
$38 $36.5
ii.
$38 $3.5
iii.
$40 $40
iv.
$40 $3.5