MGMT S-2000
Summer, 2014

Problem Set 5
(Due Monday, Aug. 4)


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	Net	Bid	Ask	Vol	Open Int	Puts	Last Sale	Net	Bid	Ask	Vol	Open Int
 

14 Aug 42.50 (WMT LV-E)
12.30	0.0	12.65	13.05	0	28	14 Aug 42.50 (WMT XV-E)
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	35895	14 Aug 60.00 (WMT XL-E)
4.70	-0.15	4.70	4.80	30	6125
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	0.0	7.05	7.35	0	4144
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	0.0	9.40	9.85	0	2743
14 Aug 67.50 (WMT LR-E)
0.01	0.0	0.0	0.02	0	4278	14 Aug 67.50 (WMT XR-E)
10.60	0.0	11.90	12.40	0	763
14 Aug 70.00 (WMT LN-E)
0.02	0.0	0.0	0.02	0	4431	14 Aug 70.00 (WMT XN-E)
13.40	0.0	14.40	14.85	0	510
14 Aug 75.00 (WMT LO-E)
0.01	0.0	0.0	0.01	0	1057	14 Aug 75.00 (WMT XO-E)
19.50	+0.25	19.40	19.95	10	20
14 Sept 42.50 (WMT AV-E)
12.82	0.0	13.00	13.15	0	215	14 Sept 42.50 (WMT MV-E)
0.27	-0.11	0.28	0.30	219	3497
14 Sept 45.00 (WMT AI-E)
10.75	+0.45	10.65	10.80	55	41905	14 Sept 45.00 (WMT MI-E)
0.48	-0.01	0.42	0.45	140	68355
14 Sept 47.50 (WMT AW-E)
8.82	+1.02	8.40	8.55	1	4946	14 Sept 47.50 (WMT MW-E)
0.61	-0.09	0.67	0.70	179	31750
14 Sept 50.00 (WMT AJ-E)
6.60	-0.20	6.30	6.40	44	68621	14 Sept 50.00 (WMT MJ-E)
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	80	1174
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	0.0	5.55	5.70	0	67158
14 Sept 62.50 (WMT AA-E)
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
14 Sept 65.00 (WMT AM-E)
0.18	-0.03	0.18	0.21	64	82933	14 Sept 65.00 (WMT MM-E)
9.30	-1.33	9.85	10.00	5	17887
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	0.0	14.70	14.85	0	1319
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	259
		



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 option’s 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.
















3.	(40 pts)
	[Note:  You’ll 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	 0.3	  0.2	  0.2	  0.1
				Stock price	$80	$90	$100	$110	$120
				Gain from	$15	  $5	    $0	  $10 	  $20
				long strangle

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.