Derivatives Strategies
Problems
Aline Nuñes is a junior analyst in the derivatives research division of an international securities firm. Nuñes’s
supervisor, Cátia Pereira, asks her to conduct an analysis of various options trading strategies relating to shares
of three companies: IZD, QWY, and XDF. On 1 February, Nuñes gathers selected option premium data on the
companies, which is presented in Exhibit 1.
Nuñes considers the following option strategies relating to IZD.
• Strategy 1: Constructing a synthetic long put position in IZD
• Strategy 2: Buying 100 shares of IZD and writing the April $95.00 strike call option on IZD
• Strategy 3: Implementing a covered call position in IZD using the April $97.50 strike option
Nuñes next reviews the following option strategies relating to QWY.
• Strategy 4: Implementing a protective put position in QWY using the April $25.00 strike option
• Strategy 5: Buying 100 shares of QWY, buying the April $24.00 strike put option, and writing the April
$31.00 strike call option
• Strategy 6: Implementing a bear spread in QWY using the April $25.00 and April $31.00 strike options
Finally, Nuñes considers two option strategies relating to XDF.
• Strategy 7: Writing both the April $75.00 strike call option and the April $75.00 strike put option on XDF
• Strategy 8: Writing the February $80.00 strike call option and buying the December $80.00 strike call option
on XDF
Over the past few months, Nuñes and Pereira have followed news reports on a proposed merger between XDF and
one of its competitors. A government antitrust committee is currently reviewing the potential merger. Pereira
expects the share price to move sharply up or down depending on whether the committee decides to approve or
reject the merger next week.
1
Pereira asks Nuñes to recommend an option trade that might allow the firm to benefit from a significant move in
the XDF share price regardless of the direction of the move.
Questions
1. Strategy 1 would require Nuñes to buy:
• A. shares of IZD.
• B. a put option on IZD.
• C. a call option on IZD.
2. Based on Exhibit 1, Nuñes should expect Strategy 2 to be least profitable if the share price of IZD at option
expiration is:
• A. less than $91.26.
• B. between $91.26 and $95.00.
• C. more than $95.00.
3. Based on Exhibit 1, the breakeven share price of Strategy 3 is closest to:
• A. $92.25.
• B. $95.61.
• C. $95.82.
4. Based on Exhibit 1, the maximum loss per share that would be incurred if Strategy 4 was implemented is:
• A. $2.99.
• B. $3.99.
• C. unlimited.
5. Strategy 5 is best described as a:
• A. collar.
• B. straddle.
• C. bear spread.
6. Based on Exhibit 1, Strategy 5 offers:
• A. unlimited upside.
• B. a maximum profit of $2.48 per share.
• C. protection against losses if QWY’s share price falls below $28.14.
7. Based on Exhibit 1, the breakeven share price for Strategy 6 is closest to:
• A. $22.50.
• B. $28.50.
• C. $33.50.
8. Based on Exhibit 1, the maximum gain per share that could be earned if Strategy 7 is implemented is:
• A. $5.74.
• B. $5.76.
• C. unlimited.
9. Based on Exhibit 1, the best explanation for Nuñes to implement Strategy 8 would be that, between the
February and December expiration dates, she expects the share price of XDF to:
• A. decrease.
• B. remain unchanged.
• C. increase.
10. The option trade that Nuñes should recommend relating to the government committee’s decision is a:
• A. collar.
• B. bull spread.
• C. long straddle.
2