You believe that Tesla will go down by 20% over the next few months. Create a bear
Question:
You believe that Tesla will go down by 20% over the next few months. Create a bear spread portfolio from available options (use bid-ask midpoint) that has no time 0 cost and will be profitable if Tesla goes down exactly 20%.
(a) Describe exactly the options you would buy including the prices and show that there is no cost (or positive payout) to the position today
(b) Draw a diagram that shows the payoffs at time T. Label the diagram clearly.
Note:
Let us just say Tesla current price is 424.68, closest exercise price = 425 and the respective midpoint is 6.68
When Tesla Price (20% down) = 339.744, Closest exercise price 340, and respective midpoints = 74.05
Fundamentals of Investing
ISBN: 978-0133075359
12th edition
Authors: Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk