1.     The goal of this assignment is to learn about various option strategies and related issues: the profits at expiry, the maximum loss and under what conditions it happens, the maximum gain and under what conditions it happens, the breakeven price etc.

If you find it easier to write out the assignment by hand instead of doing it electronically, that is fine with me too.

From Yahoo.com, obtain GOOG’s call and option price as of the close of the 8^th week of class for the third-month expiry contracts.  That is, if we are in November, then choose the February-expiry contract.

[In Yahoo – Finance, type in GOOG, you will see data on GOOG.  On the left of the screen, you will see a link for options and you can see the entire list of options. Please note that if you don’t download the prices by the next day, you will not be able to get the prices from Yahoo.com.]

Then, do the following.  

a)     Assume you already own the stock.  You decide to buy a protective put.  Write the profits (or value) using notations used in class (X, S_T, P_P, P_C) under appropriate stock price regimes.  An example is given below. 

Choose the option whose exercise price is just below 5% off the current price.  Graph your portfolio value as a function of S_T. What is the lowest value your portfolio could fall to? What is the maximum and minimum portfolio value that your portfolio could reach?

b)     Assume you already own the stock.  You decide to write a covered call. Write the profits using notations used in class (X, S_T, P_P, P_C) under appropriate stock price regimes.  Choose the option whose exercise price is just above 5% off the current price.  Graph your portfolio value as a function of S_T.  What is the maximum and minimum portfolio value that your portfolio could reach?

c)     Assume you already own the stock.  You choose to write a collar.  Write the profits (or value) using notations used in class (X, S_T, P_P, P_C) under appropriate stock price regimes.  Choose the out-of-the-money put option whose exercise price is just below 5% off the current price.  Choose the out-of-the-money call option whose exercise price is just above 5% of the current price.  Graph your portfolio value as a function of S_T. What is the maximum and minimum portfolio value that your portfolio could reach?

d)     Write the profits using notations used in class (X, S_T, P_P, P_C) under appropriate stock price regimes for a bull spread created using calls.  Choose the long exercise price such that that is just above the current price. Choose the short call exercise price to be $20 above the long call exercise price. State clearly the exercise price of the options that are bought and sold. Graph the profit profile as a function of S_T.  What is the break-even price and under what price range do you make profits? What is the maximum profit and under what price range does this happen? What is the maximum loss and under price range does this happen?

e)     Write the profits using notations used in class (X, S_T, P_P, P_C) under appropriate stock price regimes for a bear spread created using calls.  Choose the short call exercise price that is just above the current price and choose the long call exercise that is $20 above the short call exercise price. State clearly the exercise price of the options that are bought and sold. Graph the profit profile as a function of S_T.  What is the break-even price and under what price range do you make profits? What is the maximum profit and under what price range does this happen? What is the maximum loss and under price range does this happen?