To draw: A payoff graph for the above said strategy at the option expiration date. Introduction: Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

Question

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Answer 1

Question

Chapter 20, Problem 27PS

a.

Summary Introduction

To draw: A payoff graph for the above said strategy at the option expiration date.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

b.

Summary Introduction

To draw: A profit graph for the above said strategy.

Introduction:

Profit graph: It can also be called as risk graph. Profit graph is supposed to be visual depiction on possible outcomes of an options strategy on a graph. On the vertical axis, the profit/loss is depicted whereas the horizontal axis depicts the underlying stock price on expiration date.

c.

Summary Introduction

To compute: The break-even point for the above said strategy. Also, state whether the investor is bullish or bearish on the stock.

Introduction:

Bull spread: It is a concept used in the trading of options. It is supposed to be a bullish vertical spread options strategy where profit can be earned only when there is a moderate increase in the underlying asset’s price.

Bear spread: It is a concept used in the trading of options. Normally, an investor buys a contract with a high strike price and sells a contract when the strike price is low. By doing this, there is a chance to earn more profit with a decrease in price.

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Students have asked these similar questions

You write a put option with X = 100 and buy a put with X = 110. The puts are on the same stock and have the same expiration date.a. Draw the payoff graph for this strategy.b. Draw the profit graph for this strategy.c. If the underlying stock has positive beta, does this portfolio have positive or negative beta?

Suppose that put options on a stock with strike prices $66 and $75 cost $3 and $5, respectively. How can the options be used to create (a) a bull spread and (b) a bear spread? For what range of future stock prices will the bear spread strategy be profitable. Is the profit for the bear spread strategy limited? If so, how much and at what price range? At what price range will you exercise the long position from the bear spread strategy? At what range of future stock prices will the bear spread strategy lead to a loss? What is the maximum loss that you can incur from bear spread strategy and at what price range?

Based on Torelli’s scenarios, what is the mean return of GMS stock? What is the standard deviation of the return of GMS stock? 2. After a cursory examination of the put option prices, Torelli suspects that a good strategy is to buy one put option A for each share of GMS stock purchased. What are the mean and standard deviation of return for this strategy?

Answer 2

Question

Chapter 20, Problem 27PS

a.

Summary Introduction

To draw: A payoff graph for the above said strategy at the option expiration date.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

b.

Summary Introduction

To draw: A profit graph for the above said strategy.

Introduction:

Profit graph: It can also be called as risk graph. Profit graph is supposed to be visual depiction on possible outcomes of an options strategy on a graph. On the vertical axis, the profit/loss is depicted whereas the horizontal axis depicts the underlying stock price on expiration date.

c.

Summary Introduction

To compute: The break-even point for the above said strategy. Also, state whether the investor is bullish or bearish on the stock.

Introduction:

Bull spread: It is a concept used in the trading of options. It is supposed to be a bullish vertical spread options strategy where profit can be earned only when there is a moderate increase in the underlying asset’s price.

Bear spread: It is a concept used in the trading of options. Normally, an investor buys a contract with a high strike price and sells a contract when the strike price is low. By doing this, there is a chance to earn more profit with a decrease in price.

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Answer 3

Question

Chapter 20, Problem 27PS

a.

Summary Introduction

To draw: A payoff graph for the above said strategy at the option expiration date.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

b.

Summary Introduction

To draw: A profit graph for the above said strategy.

Introduction:

Profit graph: It can also be called as risk graph. Profit graph is supposed to be visual depiction on possible outcomes of an options strategy on a graph. On the vertical axis, the profit/loss is depicted whereas the horizontal axis depicts the underlying stock price on expiration date.

c.

Summary Introduction

To compute: The break-even point for the above said strategy. Also, state whether the investor is bullish or bearish on the stock.

Introduction:

Bull spread: It is a concept used in the trading of options. It is supposed to be a bullish vertical spread options strategy where profit can be earned only when there is a moderate increase in the underlying asset’s price.

Bear spread: It is a concept used in the trading of options. Normally, an investor buys a contract with a high strike price and sells a contract when the strike price is low. By doing this, there is a chance to earn more profit with a decrease in price.

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Answer 4

Question

Chapter 20, Problem 27PS

a.

Summary Introduction

To draw: A payoff graph for the above said strategy at the option expiration date.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

b.

Summary Introduction

To draw: A profit graph for the above said strategy.

Introduction:

Profit graph: It can also be called as risk graph. Profit graph is supposed to be visual depiction on possible outcomes of an options strategy on a graph. On the vertical axis, the profit/loss is depicted whereas the horizontal axis depicts the underlying stock price on expiration date.

c.

Summary Introduction

To compute: The break-even point for the above said strategy. Also, state whether the investor is bullish or bearish on the stock.

Introduction:

Bull spread: It is a concept used in the trading of options. It is supposed to be a bullish vertical spread options strategy where profit can be earned only when there is a moderate increase in the underlying asset’s price.

Bear spread: It is a concept used in the trading of options. Normally, an investor buys a contract with a high strike price and sells a contract when the strike price is low. By doing this, there is a chance to earn more profit with a decrease in price.

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Answer 5

Chapter 20, Problem 27PS

a.

Summary Introduction

To draw: A payoff graph for the above said strategy at the option expiration date.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

b.

Summary Introduction

To draw: A profit graph for the above said strategy.

Introduction:

Profit graph: It can also be called as risk graph. Profit graph is supposed to be visual depiction on possible outcomes of an options strategy on a graph. On the vertical axis, the profit/loss is depicted whereas the horizontal axis depicts the underlying stock price on expiration date.

c.

Summary Introduction

To compute: The break-even point for the above said strategy. Also, state whether the investor is bullish or bearish on the stock.

Introduction:

Bull spread: It is a concept used in the trading of options. It is supposed to be a bullish vertical spread options strategy where profit can be earned only when there is a moderate increase in the underlying asset’s price.

Bear spread: It is a concept used in the trading of options. Normally, an investor buys a contract with a high strike price and sells a contract when the strike price is low. By doing this, there is a chance to earn more profit with a decrease in price.

Answer 6

Chapter 20, Problem 27PS

a.

Summary Introduction

To draw: A payoff graph for the above said strategy at the option expiration date.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

Answer 7

Chapter 20, Problem 27PS

a.

Summary Introduction

To draw: A payoff graph for the above said strategy at the option expiration date.

Introduction:

Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.

Answer 8

b.

Summary Introduction

To draw: A profit graph for the above said strategy.

Introduction:

Profit graph: It can also be called as risk graph. Profit graph is supposed to be visual depiction on possible outcomes of an options strategy on a graph. On the vertical axis, the profit/loss is depicted whereas the horizontal axis depicts the underlying stock price on expiration date.

Answer 9

b.

Summary Introduction

To draw: A profit graph for the above said strategy.

Introduction:

Profit graph: It can also be called as risk graph. Profit graph is supposed to be visual depiction on possible outcomes of an options strategy on a graph. On the vertical axis, the profit/loss is depicted whereas the horizontal axis depicts the underlying stock price on expiration date.

Answer 10

c.

Summary Introduction

To compute: The break-even point for the above said strategy. Also, state whether the investor is bullish or bearish on the stock.

Introduction:

Bull spread: It is a concept used in the trading of options. It is supposed to be a bullish vertical spread options strategy where profit can be earned only when there is a moderate increase in the underlying asset’s price.

Bear spread: It is a concept used in the trading of options. Normally, an investor buys a contract with a high strike price and sells a contract when the strike price is low. By doing this, there is a chance to earn more profit with a decrease in price.

Answer 11

c.

Summary Introduction

To compute: The break-even point for the above said strategy. Also, state whether the investor is bullish or bearish on the stock.

Introduction:

Bull spread: It is a concept used in the trading of options. It is supposed to be a bullish vertical spread options strategy where profit can be earned only when there is a moderate increase in the underlying asset’s price.

Bear spread: It is a concept used in the trading of options. Normally, an investor buys a contract with a high strike price and sells a contract when the strike price is low. By doing this, there is a chance to earn more profit with a decrease in price.

Answer 12

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Answer 13

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Answer 14

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Answer 15

Ch. 20 - Prob. 1PS Ch. 20 - Prob. 2PS Ch. 20 - Prob. 3PS Ch. 20 - Prob. 4PS Ch. 20 - Prob. 5PS Ch. 20 - Prob. 6PS Ch. 20 - Prob. 7PS Ch. 20 - Prob. 8PS Ch. 20 - Prob. 9PS Ch. 20 - Prob. 10PS

Solution Summary: The author explains how to draw a payoff graph for the above-mentioned strategy at the option expiration date.

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