Consider the following option trading strategies:

 

a) The options with strike prices R80, R85, and R90 cost R12, R15, and R19, respectively. Suppose a trader creates a butterfly spread from the options by trading a total of 400 options, determine the maximum net loss to the butterfly spread after considering the cost of the options. 

b) The table consists of call and put premiums for 3-month European options with different strike prices for a non-dividend

 paying stock with S0 = R40 and r = 0.08 p.a. continuously compounded

Strike Price	Call Option Premium	Put Option Premium
R35	R6.13	R0.44
R40	R2.78	R1.99
R45	R0.97	R5.08

 

 

A trader is considering two strategies using the information on the options provided in the table. The first strategy is a strangle consisting of a R35-strike put and a R45-strike call. The second strategy is an R40-strike straddle. 

a) Explain how the options can be used to create the first strategy. 

b)  Explain how the options can be used to create the second strategy. 

c). Let S be the stock price in three months. Construct a table that shows the profit for the first strategy. 

d) Let S be the stock price in three months. Construct a table that shows the profit for the second strategy. 

e) Let S be the stock price in three months.

 Determine the range of stock prices in 3 months for which the first strategy outperforms the second strategy.

Answer rating: 100% (QA)

a To create the first strategy a strangle the trader buys a R35strike put option and a R45strike call option The strangle is a strategy used when the trader expects significant price volatility in the ... View the full answer