Question no 1 Put options - 25 pts

1. Put options are like a bond and a short position in the stock. Explain this state- ment.
2. Based on this statement, explain what the theta of a deep in-the-money put will be. Provide a solid intuition for your answer.
3. Based on this statement, explain what the theta of a deep out-of-the-money put will be.
4. What kind of put will have the largest theta in terms of absolute value? Plot theta as a function of the current stock price for a given put.
5. Suppose you are in the business of selling deep out-of-the money puts. Explain what your risk exposure is using the various Greeks weve discussed in cl

Question no 2

1. Trading volatility consists of buying (selling) the level of implied volatility. One of the first and most common ways of trading volatility is to purchase (sell) a straddle and maintain a delta neutral position until expiration.
   1. Explain what is meant by a delta neutral (straddle) strategy and how it is implemented. (10 pts)
   2. What are the main drivers of the profit and loss of a volatility trade implemented in this manner? (10 pts)

Question no 3

A 3 month at-the-money call option on stock XYZ has the same price as a 2 month at-the-money call option on stock ABC. How/Why is that possible? Discuss any other relevant aspects to this observation as you see appropriate.