On the 10th of January 2014 an investor made the following trades to set up a spread:
Question:
On the 10th of January 2014 an investor made the following trades to set up a spread:
i). Sold 10 contracts of January 24th expiry call options on the S&P 500 index, strike price 1800, premium $44.03
ii). Bought 10 contracts of January 24th expiry call options on the S&P 500 index, strike price 1790, premium $53.28
a). What was the initial investment for the trade?
b). What would the profit/loss of the trade have been if the S&P 500 had closed January 24th above 1800?
c). The S&P 500 closed January 23rd (one day prior to options expiry) at 1828.46. The market dropped sharply on Friday January 24th and reached 1800 within the first hour of trading. With 20 minutes left at the end of the day the S&P 500 was approximately 1795. What was the unrealized profit/loss on the spread trade at that point (assume $0 time value on the options)?
d). The S&P 500 then dropped sharply at the close of the day, closing at 1790.29. What was the final realized profit/loss on the trade?
e). At the time the trade was set up the S&P 500 index was 1,850. What were the theoretical maximum loss and maximum profit levels? Why would somebody implement a trade of this nature?
Managing Controlling and Improving Quality
ISBN: 978-0471697916
1st edition
Authors: Douglas C. Montgomery, Cheryl L. Jennings, Michele E. Pfund