1. (30 pts) Say that on a recent day, Wal Mart stock closed at $55.19 per share, down $.05 on the day. Consider the following chart giving the premium as of close of trading on that day, on various options on Wal Mart stock: WMT (WAL MART STORES INC) 55.19 -0.05 Calls Last Sale 14 Aug 42.50 (WMT LV-E) 12.30 0.0 12.65 13.05 0 0.02 0.0 0.0 0.02 0 3194 14 Aug 45.00 (WMT LI-E) 10.15 0.0 10.15 10.60 0 224 14 Aug 45.00 (WMT XI-E) 0.02 0.0 0.0 0.02 45 14141 14 Aug 47.50 (WMT LW-E) 7.56 0.0 7.70 8.10 0 611 14 Aug 47.50 (WMT XW-E) 0.01 -0.03 0.0 0.03 42 16007 14 Aug 50.00 (WMT LJ-E) 5.80 0.0 5.25 5.35 290 5611 14 Aug 50.00 (WMT XJ-E) 0.02 -0.02 0.02 0.03 112 66726 14 Aug 52.50 (WMT LX-E) 3.33 -0.02 2.83 2.89 182 15093 14 Aug 52.50 (WMT XX-E) 0.08 -0.07 0.08 0.11 386 20154 14 Aug 55.00 (WMT LK-E) 0.92 -0.32 0.85 0.89 1672 34325 14 Aug 55.00 (WMT XK-E) 0.59 -0.01 0.58 0.62 2663 27823 14 Aug 57.50 (WMT LY-E) 0.20 -0.08 0.12 0.14 2220 20681 14 Aug 57.50 (WMT XY-E) 1.85 -0.41 2.33 2.38 365 10451 14 Aug 60.00 (WMT LL-E) 0.03 -0.01 0.01 0.04 114 14 Aug 62.50 (WMT LA-E) 0.01 0.0 0.0 0.03 0 20656 14 Aug 62.50 (WMT XA-E) 7.55 14 Aug 65.00 (WMT LM-E) 0.02 0.0 0.0 0.02 0 19428 14 Aug 65.00 (WMT XM-E) 10.43 14 Aug 67.50 (WMT LR-E) 0.01 0.0 0.0 0.02 0 4278 14 Aug 67.50 (WMT XR-E) 14 Aug 70.00 (WMT LN-E) 0.02 0.0 0.0 0.02 0 4431 14 Aug 70.00 (WMT XN-E) 14 Aug 75.00 (WMT LO-E) 0.01 0.0 0.0 0.01 14 Sept 42.50 (WMT AV-E) 12.82 14 Sept 45.00 (WMT AI-E) Net Bid Ask 0.0 13.00 13.15 10.75 +0.45 10.65 10.80 14 Sept 47.50 (WMT AW-E) 8.82 +1.02 8.40 8.55 Vol Open Puts Int 28 14 Aug 42.50 (WMT XV-E) 3589 14 Aug 60.00 (WMT XL-E) 5 Last Sale Net Bid Ask Open Int 30 6125 0.0 7.05 7.35 0 4144 0.0 9.40 9.85 0 2743 10.60 0.0 11.90 12.40 0 763 13.40 0.0 14.40 14.85 0 510 0 1057 14 Aug 75.00 (WMT XO-E) 19.50 +0.25 19.40 19.95 10 20 0.27 -0.11 0.28 0.30 219 3497 0.48 -0.01 0.42 0.45 140 68355 1 4946 14 Sept 47.50 (WMT MW-E) 0.61 -0.09 0.67 0.70 179 31750 0 215 14 Sept 42.50 (WMT MV-E) 55 41905 14 Sept 45.00 (WMT MI-E) 44 68621 14 Sept 50.00 (WMT MJ-E) 4.70 -0.15 4.70 4.80 Vol 14 Sept 50.00 (WMT AJ-E) 6.60 -0.20 6.30 6.40 1.05 -0.04 1.06 1.09 210 119331 14 Sept 52.50 (WMT AX-E) 4.80 -0.15 4.45 4.55 121 3230 14 Sept 52.50 (WMT MX-E) 1.53 -0.18 1.67 1.72 78 3527 14 Sept 55.00 (WMT AK-E) 2.96 -0.34 2.88 2.94 535 49005 14 Sept 55.00 (WMT MK-E) 2.51 -0.06 2.60 2.65 306 49303 14 Sept 57.50 (WMT AY-E) 1.84 -0.12 1.68 1.73 192 4390 14 Sept 57.50 (WMT MY-E) 3.85 -0.05 3.85 4.00 14 Sept 60.00 (WMT AL-E) 0.96 -0.04 0.88 0.92 495 67068 14 Sept 60.00 (WMT ML-E) 5.90 14 Sept 62.50 (WMT AA-E) 14 Sept 65.00 (WMT AM-E) 14 Sept 70.00 (WMT AN-E) 0.04 -0.01 0.03 0.06 150 44079 14 Sept 70.00 (WMT MN-E) 15.75 80 1174 0.0 5.55 5.70 0 67158 0.44 -0.07 0.40 0.44 432 3725 14 Sept 62.50 (WMT MA-E) 7.60 -1.35 7.60 7.70 10 244 0.18 -0.03 0.18 0.21 9.30 -1.33 9.85 10.00 5 17887 0 1319 64 82933 14 Sept 65.00 (WMT MM-E) 0.0 14.70 14.85 14 Sept 75.00 (WMT AO-E) 0.01 -0.02 0.01 0.03 10 3546 14 Sept 75.00 (WMT MO-E) 20.50 0.0 19.35 19.95 0 In the questions that follow, use the Last Sale column to answer questions which involve option pricing. (5 pts each) a. What was the premium on the 14 Sept. WMT 47.50 call, i.e., the Wal Mart call which expires in Sept. 2014 and has a strike price of $47.50? b. How much would an investor who wanted to buy 1 contract of the 14 Sept. WMT 47.50 call option have had to spend? c. What is the formula for the intrinsic value of a call? What was the intrinsic value of the 14 Aug. WMT 50 call? Was this option in the money or out of the money? What was the time value of this option? d. Was the 14 Sept. WMT 60 call in or out of the money? What was the intrinsic value of this option? What was the time value of this option? e. What was the premium on the 14 Sept. WMT 60 put? Was this option in or out of the money? What was the intrinsic value of this put? What is the time value? f. What was the intrinsic value of the 14 Aug. WMT 50 put? Was this option in or out of the money? What was the options time value? 2. (20 pts) On a recent day, Microsoft stock (symbol: MSFT) was at $25. Assume the nearby MSFT 25 call was selling for $1. Draw a hockey stick diagram for a long position in the MSFT 25 call. 259 3. (40 pts) [Note: Youll find this is a trick question ] If the MSFT 24 call is selling for $2.50, and the MSFT 25 call is selling for $1, construct a bull spread using these calls. a. (20 pts) Construct a table like the ones we did in class showing profit and loss at relevant stock prices for each part of the spread, and the net profit or loss for the entire spread position. b. (20 pts) Draw a hockey stick diagram for the spread, clearly labeling all the critical points. 4. (10 pts) Consider a long strangle constructed from options which have an expiration date of August 15, 2014 (the third Friday in August). The following table displays the possible prices of Boeing stock on August 15, as well as the payoffs accruing to someone who holds a long strangle on Boeing stock: Probability 0.2 Stock price $80 Gain from $15 long strangle 0.3 $90 $5 0.2 $100 $0 0.2 $110 $10 0.1 $120 $20 A long strangle is created using two options. For each option in the strangle above, indicate whether it is a put or a call, whether it is bought or sold, and calculate what its strike price is. Explain your answer.
