Finance 300 Financial MarketsPowerPoint PresentationSlide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Finance 300Financial MarketsLecture 27© Professor J. Petry, Fall 2002http://www.cba.uiuc.edu/broker/fin300/fin300pp.htm2IBM Call PutOption Strike Expiration Vol Last Vol Last50 40 Dec 7 10 1/16 275 1/1650 40 Jan 122 10 1/8 282 3/1650 40 Apr 56 10 1/4 41 1/250 45 Nov 1793 5 1130 1/850 45 Dec 220 5 1/8 504 3/850 45 Jan 768 5 3/4 432 3/450 45 Apr 359 6 1/2 . . . . . . . .50 50 Nov 10012 7/8 4608 1 1/1650 50 Dec 1655 1 3/4 379 1 13/1650 50 Jan 2179 2 9/16 283 2 9/1650 50 Apr 444 3 5/8 271 3 5/850 55 Nov 561 1/8 50 5 3/850 55 Dec 3632 1/2 35 5 3/850 55 Jan 1606 15/16 56 6 1/450 55 Apr 340 1 7/8 26 6 3/450 60 Jan 529 3/8 10 9 3/450 60 Apr 93 13/1650 65 Jan 76 3/1650 70 Jan 348 1/163Strategy Options Strategies: Covered Call Equity Strategy:Buy IBM and Write a Call Buy IBM SharesStrike Price:$40 $50 $60Initial Investment:stock purchase -5,000 -5,000 -5,000 -5,000premium 1,012.50 256.25 37.50Total: -3,987.50 -4,743.75 -4,962.50 -5,000$30exercisestock value 3,000 3,000 3,000 3,000profit -987.50 -1,743.75 -1,962.50 -2,000$40exercisestock value 4,000profit -1,000$50exercisestock value 5,000profit 0$60exercisestock value 6,000profit 1,000$70exercise 4,000 5,000 6,000stock value 7,000profit 12.50 256.25 1,037.50 2,000Rate of return45Options Strategies: Collar on 10,000 shares of IBMInitial Investment:Buy a protective put on shares already owned (buy 100 $40 April puts) -5,000.00Write enough call options to pay for the put (write 62 $60 April calls) 5,037.50Net new investment: 37.50$30exercise put, selling shares at $40 400,000call expiresretained premium 37.50profit 400,037.50$40market value of shares 400,000let put expirecall expiresretained premium 37.50profit 400,037.50$50market value of shares 500,000let put expirecall expiresretained premium 37.50profit 500,037.506$60market value of shareslet put expirecall expiresretained premiumprofit$70let put expirecall is exercised, forced to sell 6,200 shares at $60remaining 3,800 shares valued at market priceretained premiumprofit$80let put expirecall is exercised, forced to sell 6,200 shares at $60remaining 3,800 shares valued at market priceretained premiumprofit$90let put expirecall is exercised, forced to sell 6,200 shares at $60remaining 3,800 shares valued at market priceretained premiumprofit78Buy Straddle: buy 1 put and 1 call for same asset, strike and expiryBuy option contracts for IBM, $50 strike, January expiry.Premium Call Put Profit$30 expires exerciseasset valueprofit 1,487.50$40 expires exerciseasset valueprofit 487.50$50 expires expires-512.5$60 exercise expiresasset valueprofit 487.50$70 exercise expiresasset valueprofit 1,487.50910Butterfly Spread: buy a low $ call, a high $ call, sell 2 middle $ callsBuy 1 April call @ 40, Write 2 April calls @ 45, buy 1 April call @ 50Premium $40 call $45 call $50 call Total$35.00 expires expires expires-87.50$40.00 expires expires expires-87.50$42.50 -4,000 expires expires4,250-87.50 250$45.00 -4,000 expires expires4,500-87.50 500$47.50 -4,000 9,000 expires4,750 -9,500-87.50 750