Chapter 5: Q2B (page 512)
Why do you think the most actively traded options tend to be the ones that are near the money?
Because they have the highest time premium and potential gain.
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All else being equal, is a put option on a high-beta stock worth more than one on a lowbetastock? The firms have identical firm-specific risk.
Joseph Jones, a manager at Computer Science, Inc. (CSI), received 10,000 shares of company stock as part of his compensation package. The stock currently sells at \(40 a share. Joseph would like to defer selling the stock until the next tax year. In January, however, he will need to sell all his holdings to provide for a down payment on his new house. Joseph is worried about the price risk involved in keeping his shares. At current prices, he would receive \)40,000 for the stock. If the value of his stock holdings falls below \(35,000, his ability to come up with the necessary down payment would be jeopardized.
On the other hand, if the stock value rises to \)45,000, he would be able to maintain a small cash reserve even after making the down payment. Joseph considers three investment strategies:
a. Strategy A is to write January call options on the CSI shares with strike price \(45. These calls are currently selling for \)3 each.
b. Strategy B is to buy January put options on CSI with strike price \(35. These options also sell for \)3 each.
c. Strategy C is to establish a zero-cost collar by writing the January calls and buying the January puts.
Evaluate each of these strategies with respect to Joseph’s investment goals. What are the advantages and disadvantages of each? Which would you recommend?
Devise a portfolio using only call options and shares of stock with the following value (payoff ) at the option expiration date. If the stock price is currently $53, what kind of bet is the investor making?
Use the put-call parity relationship to demonstrate that an at-the-money call option ona non-dividend-paying stock must cost more than an at-the-money put option. Showthat the prices of the put and call will be equal if S =(1 + r)T.
Joan Tam, CFA, believes she has identified an arbitrage opportunity for a commodity as indicated by the information given in the following exhibit:
a. Describe the transactions necessary to take advantage of this specific arbitrage opportunity.
b. Calculate the arbitrage profit.
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