[q11u25p]

My question is :

4. You have started the short position on the S&P index October last year. Now the index has gone down 35% and you had nice unrealized profit. Corporate earnings and macro-economics data still keeping dragging the market down and you would like to hold the position a little bit longer, but you also hate that nervous feeling from those quick and short rallies in the past three months. You are even more nervous now since the index has been down to the lowest level since 1996. How do you hedge your short position and take advantage of the currently volatile market? Please explain?

3. Company ABC offers project-related services in engineering, technology, construction, fabrication, environmental industry with diverse customer base worldwide. In the past three weeks, the company has bounced from its lowest point in the past three years ($11.40) to $20 this week. At the same time, the volatility of this stock has been pumped-up. You are in favor of the company since the company is well positioned on its balance sheet and on the environmental industry new construction opportunities.

What strategy will provide you the downside protection if you want to long the stock? What is the benefit of this strategy other than the downside protection? What is the result of this strategy at the expiration date? (You can assume your call or put premium.)

[ArcSine]

Long straddles and short butterflys are commonly used to exploit expected volatility. They're fashioned by cobbling together appropriate call and put positions.

Read the forum's homework help rules, then check back in with your thoughts and efforts on the questions.

[q11u25p]

Do you answer for number 4?

[ArcSine]

Yes.

[q11u25p]

thank you! I have another question to ask you.

1. XYZ is at $24.85. This stock is a relatively new listing, but is a strong competitor in its industry. You are bullish on XYZ. You are expecting a 15% increase in the stock over the next 6 months as news of its industry position comes out.

You want to establish a large (1,000 shares) position over the short-term, but do not want to pay $24,850 capital cost at the onset. You also want to keep as much upside as possible, and are willing to accept downside risk of the stock.

Use combination of Call and put options to create a synthetic stock. What is the capital investment? What is the future payoff of this strategy?

for this question you can assume call or put price.

I think for this question, we can buy call and sell put to instead of buying stock to reduce cost of buying stock. However, I am not sure if I am coorect. So I want you correct me. Thank you very much!

second question:
what is another expression for intrinsic value? (a. parity, b. parity value, c. exercise value, d. all of the above, e. none of the above) which one is correct.

the time value of an option is also referred to as the (a. synthetic value, b. strike value, c. speculative value, d. parity value, e. none of the above) which one is correct?

I think these two questions answer are all E which is none of the above. How do you think?

[q11u25p]

two TRUE OR FALSE QUESTIONS:
1. exercise prices are set in $5 increments for options on exchanges.
2.the concept of the intrinsic value does not apply to European calls prior to expiration because they can not be exercised immediately.

[ArcSine]

Regarding your synthetic stock question, you're correct that you can synthesize the equity with a combo of long calls and short puts. (This is the version of long synthetic equity which minimizes the initial cost, which your question seems to hint as being an objective.)

There's another version which adds a long investment in risk free bonds, where your initial outlay is the PV of the calls' strike price. But your question states that you're to build your synthetic position with options only, so I'm guessing the first version is what they're looking for.

As to your second and third questions in that post, here's a hint by way of example: Suppose a call has a strike of 90, the underlying is at 94 today, and the call is trading at 97 today. In this illustration the call's intrinsic value is 4, and its time value is 3.

On your T/Fs, explain your thoughts on the answers, and why. Best regards,

[q11u25p]

T/F question just need to answer T OR F . We do not need to explain it

[q11u25p]

Do you have email which I can contact you directly?

[q11u25p]

For question 3 in my first posted, I can use protective put or cover call to protect downrisk right?

[ArcSine]

Sorry, I didn't state that one too clearly. I was referring to this forum's rules regarding homework assistance. We can't simply dispense answers to your homework questions like a vending machine; instead you have to state what you think the answer is, and give your reasons. If you're incorrect, we can provide guidance to get you back on track.

As to the email question, you're better off sticking with using this forum--where the answers (or the homework assistance) is FREE :) (I'm not nearly as benevolent as this forum when it comes to private consultations ;) ).

And yes, you can use protective (long) puts to establish a loss-limiting floor underneath your long position in Company ABC. If you sell covered calls, though, you are defraying the immediate cost of ABC equity via the calls' proceeds, but at the expense of giving away the upside potential. That's contrary to what the question gives as your objective.

[q11u25p]

Thank you very much!! I got more confidence after you explain to me.