Question

Consider the following:

BBB is 43 in May There are July options at 37.5, 40, 45, and 50

21. You think it could go to 40 by July. Give three specific option strategies for profiting on this move with limited risk.

22. You think it could go to 47 by July. Give three specific option strategies for profiting on this move with limited risk.

23. You believe that the stock will make a big move by July to either 55 or 35. Give a specific option strategy for profiting on this move.

Answer 1

21) This is a bearish trend indicator. The three strategies can be:

Long put- One has to pay premium but loss is limited till premium.
Short call at 45- One would gain by getting premium and does not lose if prices go below. Risk is if price rises

Bear put spread- Write an equal number of out of the money puts at a lower price

22) Long call- Premium is paid and loss is limited to premium
Short put- Premium received. Loss when there is a bearish trend

Bull call spread-Write an equal number of out of the money calls at a lower price

23)One can enter a long straddle whereby there are:

Two Transactions (buy call options and buy put options)- Buy 45 call and put options

Upfront cost of options- However profit if prices move either way in a big way.