3. You believe that Tesla will go down by 20% over the next few months.

a) 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%.

(i) Describe exactly the options you would buy including the prices and show that there is no cost (or positive payout) to the position today

(ii) Draw a diagram that shows the payoffs at time T. Label the diagram clearly.

b) Create a butterfly spread from available options (use bid-ask midpoint) that will pay you if Tesla goes down by about 20% or up by about 20% over the next few months. Try to create this spread with as little up front cost as possible.

(i) Describe exactly the options you would buy including the prices and show the cost to the position today

(ii) Draw a diagram that shows the payoffs at time T. Label the diagram clearly.