1. You believe the price of PPRO will rise and are therefore considering either (a) taking a long position in a $45 call by paying a premium of $3, or (b) taking a short position in a $45 put for which you will receive a premium of $3. If the stock price is $50 on the expiration date, which position makes you better off?
2. You believe the price of PPRO will fall and are therefore considering either (a) taking a long position in a $35 put, paying a premium of $2, or (b) taking a short position in a $35 call, receiving a premium of $2. If the stock price is $30 on the expiration date, which position makes you better off?
3. Assume you can buy or sell either the call or the put options, with a strike price of $35. The call option has a premium of $3, and the put option has a premium of $2. Which of these option contracts can be used to form a long straddle? What is the payoff if the stock price closes at $38 on the option expiration date? What is the payoff if the stock price closes at $28 on the option expiration date?
4. Assume you can buy or sell either the call or the put options, with a strike price of $35. The call option has a premium of $3, and the put option has a premium of $2. Which of these option contracts can be used to form a short straddle? What is the payoff if the stock price closes at $38 on the option expiration date? What is the payoff if the stock price closes at $28 on the option expiration date?
You have recently spent one of your Saturday afternoons at an options seminar presented by Derivatives Traders Incorporated. Interested in putting some of your new knowledge to work, you start by thinking about possible returns from an investment in the volatile common stock of PurchasePro.com, Incorporated (PPRO). Four options currently trade on PPRO. Two are call options, one with a strike price of $35 and the other with a strike price of $45. The other two are put options, which also have strike prices of $35 and $45, respectively. To help you decide which options strategies might work, evaluate the following option positions.