A client came to you asking for your advice to create an option strategy that will...

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A client came to you asking for your advice to create an option strategy that will provide the payoff structure using certain options on Tesla's stock. The options should expire in 1 month. The payoff structure and the required type of options will be determined for each group separately and is available on LMS in the "Final Project" folder. Your task is to create a strategy that meets the client's needs using a combination of the options as specified in the payoff structure file for your group. i) Explain how your client can create the required strategy using options (i.e., what is the mix of options you need for this strategy). ii) Using a five-step binomial tree approach and showing the inputs you used in your calculation, calculate this strategy's cost (or net premium received). Assume the rr is 1.5% with quarterly compounding. Refer to the CME to obtain Tesla's implied volatility. iii) Draw the payoff and profit (loss) diagram. iv) Based on the prices you calculated for the options, at what price (or prices) of the underlying stock will the strategy breakeven? v) What assumptions did the client make that motivates the creation of this strategy? A client came to you asking for your advice to create an option strategy that will provide the payoff structure using certain options on Tesla's stock. The options should expire in 1 month. The payoff structure and the required type of options will be determined for each group separately and is available on LMS in the "Final Project" folder. Your task is to create a strategy that meets the client's needs using a combination of the options as specified in the payoff structure file for your group. i) Explain how your client can create the required strategy using options (i.e., what is the mix of options you need for this strategy). ii) Using a five-step binomial tree approach and showing the inputs you used in your calculation, calculate this strategy's cost (or net premium received). Assume the rr is 1.5% with quarterly compounding. Refer to the CME to obtain Tesla's implied volatility. iii) Draw the payoff and profit (loss) diagram. iv) Based on the prices you calculated for the options, at what price (or prices) of the underlying stock will the strategy breakeven? v) What assumptions did the client make that motivates the creation of this strategy?

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i Option strategies can be created using a combination of various types of options including calls p... View the full answer