In the lecture, we constructed a long straddle on AAPL as follows:

• one long call with strike $170 at a premium of $8.94
• one long put with strike $170 at a premium of $10.52

Constructing the payoff table as instructed in Lecture 7, you can see that the breakeven points for this long straddle are $19.46 either side of $170 (that is, $150.54 and $189.46).

A long straddle is "neutral" to the direction of AAPL price movements. The slope of the payoff diagram is the same in the positive and negative directions.

In contrast, a long strap is also an option-trading strategy that profits from a big price movement in either direction, but the profits are larger for up movements.

To see this, apply the calculations of the payoff table as instructed in Lecture 7 on the following long strip:

• two long calls with strike $170, each with a premium of $8.94
• one long put  with strike $170 at a premium of $10.52

 what are the breakeven points for this long strap? That is, at what share price does the long strap have a zero net profit?

You are bearish on Twitter share price. In other words, you believe that TWTR will fall significantly in coming weeks.

What option position could you enter to profit from a correct bearish prediction?

Select as many answers as you think appropriate.

The S&P/ASX200 market index is currently 6800. You predict that the market will fall substantially in coming weeks and are prepared to speculate on this prediction.

You enter 30 long put options written on the S&P/ASX200 index. The options have a strike price of 6450.

On the expiry date of these options, the S&P/ASX200 index sits at 6200.

What is the gross payoff (in dollars) on your index option speculation?

Note that S&P/ASX200 index

options have a standard multiplier of $A10.  Do

A few weeks ago, you realised that you were

exposed to movements in the price of oil. At that time, you hedged this exposure by entering

a long put option written on oil.

The put option had a strike price of $90

per barrel. At the time of the option expiry, the spot price of oil is $85 per

barrel.

Hedging with options gives you a degree of

flexibility. What is the rational decision to make at expiry?

You manage a share portfolio currently worth

$30m Australian dollars. The beta of this portfolio is 1.15.

Index put options trade on the S&P/ASX200

index with a strike price of 7200.

Calculate the

number of index put options required to fully hedge this share portfolio.

Note that S&P/ASX200 index

options have a standard multiplier of $A10. Round your answer to the

nearest whole number.

Several months from now, you will make a large sale of copper. As such, you are exposed to movements in the price of copper between now and then.

You will hedge this exposure using an option

contract.

Which option position will best hedge you

against unfavourable movements in copper price?

The spot exchange rate between Australian

dollars (AUD) and US Dollars (USD) is AUD 1.00 = USD 0.72. You believe that in

4 weeks time, the exchange rate will be AUD 1.00  = USD 0.75. Options are currently available

with a strike price of AUD 1.00 = USD 0.725.

Which option position is best suited to profit if

your speculation proves to be correct?

You are bullish on the prospects of ABC share price rising. There are two speculative strategies that you are considering.

• Under the first strategy, you would purchase 100 ABC shares at the spot price of $9.9.
• Under the second strategy, you would enter long European call options covering 1,000 ABC shares. The option has a strike price of $18 and can be purchased for a premium of $0.99 per share.

How high must ABC share price rise for the second strategy to become at least as profitable as the first? That is, at what share price do the two strategies provide the same profit?

Enter your answer to 2 decimal places.

The price of a stock is $17.1. A call option on this stock has a strike price of $13.6 and is quoted at $4.5.

You enter a short position in this European call option.  One option contracts covers 100 underlying shares. 

The call option is exercised when the stock price is $27.6. Calculate your total net loss:

The price of a stock on July 1 is $47.5. A trader enters a long European put option on this stock with a strike price of $52.1.

The quoted option price is $5.6. One option contract covers 100 shares.

If the put option is exercised when the stock price is $45.2, what is the trader’s net profit is: