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Melissa Simmons is the chief investment officer of a hedge fund

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Question;Melissa Simmons is the chief investment officer of a hedge;fund specializing in options trading. She is currently back testing various;option trading strategies that will allow her to profitfrom large;fluctuations-either up or down-in a stock?s price. An example of such typical;trading strategy is straddle strategy that involves the combination of a long;call and a long put with an identical strike price and time to maturity. She is;considering the following pricing information on securities associated with;friendwork, a new internet start-up hosting a leading online social network;Friendwork stock: $100;Call option with an exercise price of $100 expiring in one;year: $9;Put option with an exercise price of $100 expiring in one;year: $8;a. Use the above information on friendwork and draw a;diagram showing the net profit/loss position at maturity for the straddle;strategy. Clearly label on the graph the break-even points of the position.;b. Melissa?s colleague proposes another lower-cost option;strategy that would profit from a large fluctuation in friendwork?s stock;price;Long call option with an exercise price of $110 expiring in;one year: $6;Long put option with an exercise price of $90 expiring in;one year: $5;Similar to part a, draw a diagram showing the net;profit/loss position for the above alternative option strategy. Clearly label;on the graph the breakeven points of the position.

 

Paper#48919 | Written in 18-Jul-2015

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