Question

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The Corona-Virus Pandemic has disrupted the operations of many business entities. Depending on the core business of a company, the continuity of its business is highly uncertain. This case highlights two companies in Malaysia that falls in this uncertain circumstance. First is the Getting Corporation, which operates fleet of hotels, restaurants and entertainment outlets. Second is the Fit Gloves Corporation, which produces surgical rubber gloves, face masks and deals with various medical equipment.   

Generally, the market sentiments for listed company shares has been bearish since the Covid-19 pandemic control orders were implemented in Malaysia in March 2020. However, the businesses that involved predominantly in healthcare have achieved uptrend movements in its stock prices while the businesses that involved in tour and entertainment has its stock prices dipped.

Getting Corporations shares are currently trading at RM3.50 per share while Fit Gloves Corporation shares are trading at RM9.00 per share. Getting Corporation’s share prices had recorded a 10% drop in the last 4 weeks and had dropped about 40% since last year. Fit Gloves Corporation’s shares has recorded a 15% increase in the last 4 weeks and has appreciated by about 450% since last year.   

Assuming that you represent a financial institution that can trade options contracts and you have gathered information on both these firms. Based on the December 2020 European Options trading data on both these firms (which will expire on 28^th December 2020), you are required to strategize the best options trading which can provide profit at lowest possible cost.

Dec. 2020 Option Prices: Getting Corp.                       Dec. 2020 Option Prices: Fit Gloves Corp.

Strike Price (RM)	Call Price   (RM)	Put Price   (RM)		Strike Price (RM)	Call Price   (RM)	Put Price   (RM)
3.00	0.25	0.35		8.50	0.98	0.33
3.25	0.22	0.45		8.75	0.90	0.45
3.50	0.18	0.65		9.00	0.75	0.55
3.75	0.15	0.90		9.25	0.65	0.70
4.00	0.12	1.05		9.50	0.55	0.85
4.25	0.10	1.12		9.75	0.50	0.90
4.50	0.08	1.25		10.00	0.45	1.02

Based on the current market conditions and the option prices in the tables above, you are required to:

1. Construct the appropriate vertical option spreads strategy for each firm that could limit the cost and cap a reasonable profit.   
2. Show the appropriate spread diagrams supported by its payoff tables.
3. Provide a brief explanation on how your spread strategies in part (a) can be profitable.

  

Answer 1

Answer:

The answers for the above questions is given in the images below: