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This assignment is worth 20% and is due by Tuesday, May 4th 2021. Please upload your assignment to Blackboard as an Excel or ZIP file. Answer ALL questions.

  1. Go to Yahoo Finance: http://finance.yahoo.com/ and look up Pifzer (PFE) options: https://finance.yahoo.com/quote/PFE/options/

Note the share price on the day you do this assignment (note the date, but do this before April 30d). Go to the April 30 2021 calls and puts prices on the same date (choose your own strike prices).

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Use your own examples to construct the following strategies. Write out the tabular payoff matrix in each case:

i) Bear spread using puts

ii) Bull spread using calls

iii) Straddle

iv) Strangle

  1. On March 31st 2021, the CBOE’s VIX index http://www.cboe.com/vix was trading at 19.4. Explain how you would interpret this figure in terms of the US stock market.

NB: Form your own view as to whether VIX will increase or decrease from this level by the end of April 2021. Assume you will trade 500 options.

Using your own strike prices from the following options chain http://www.cboe.com/delayedquote/quote-table?ticker=vix analyse fully any two (2) strategies based on VIX options that you could employ to profit from this opinion.

Other strategies are here http://www.cboe.com/strategies/product-specific-strategies/vix

In addition, explain any 1 strategy that you could employ using VIX futures to profit from the same view https://www.cboe.com/products/futures/vx-cboe-volatility-index-vix-futures

NB: Calculate the subsequent profit or loss on your strategy as at April 30, 2021. Note you will need to use the appropriate multipliers for VIX options and futures.

Explain briefly what factors you considered in designing these VIX strategies.

  1. Go to the CBOE website http://www.cboe.com/delayedquote/quotes-dashboard and locate options prices for Visa (V)


Find the current share price (the latest price on the day you do this assignment)

Using your own selected April 2020 calls and puts data, consider the following:

i) Suppose you are bullish about this share. Describe a speculative option strategy that allows you to profit if your market expectations are correct, but protects you from large downside risk in the event that you are incorrect. List each trade in detail and provide profit diagrams of each option and the net position.

ii) Suppose you expect prices to remain stable for the period covered by the contracts above. Describe a speculative option strategy that would allow you to profit from this. Again, list each trade and graph each option’s profit diagram as well as the net position.

iii) Suppose instead that you believe this market will be very volatile in the near future. You do not know whether the price will go up or down, but you feel the price is about to have a big move one way or the other. Describe a speculative option strategy that would allow you to profit from this. Again, list each trade and graph each option’s profit diagram as well as the net position. Estimate how big a price move is required to earn a positive profit on your position.

a) There are bid-ask spreads to consider. In other words, if you are buying a call or put option, you have to pay the ask price, whereas selling an option involves the bid price.

b) You should obviously use the calls and puts with a greater open interest and volume as these will have prices attached.

  1. On March 31st 2021, Alibaba (BABA) shares closed at $226.73.

Use the Black-Scholes model in Excel to estimate

(i) the price of April 23 2021 CALL options with a $230 strike and

(ii) the price of April 23 2021 PUT options with a $210 strike

Check the maturity. Use the Date function to determine the number of days.

Estimate sigma using historical volatility for $BABA based on daily prices for the past year. Use the 10-year US government bond as the risk-fee rate from Bloomberg (remember to adjust the maturity in the calculation)


Compare your result to the traded price for these two options on the date you complete this question. Discuss any variation in the prices.

  1. Suppose, given recent movements in Tesla shares, a trader wishes to implement a trading strategy using options. Suppose the trader wishes to use (i) a strangle; (ii) a combination of 2 calls and 1 put; and (iii) a straddle using April 30 2021 TSLA options.

On https://www.barchart.com/stocks/quotes/TSLA/options or https://finance.yahoo.com/quote/TSLA/options?p=TSLA find the price of the call and put options on the day you complete the assignment.

For each strategy, draw a diagram showing the variation of the trader’s profit with the asset prices.

  1. Use any Options Calculator to find the theoretical BSM price of an April 30 European call option for Coca Cola with a strike of $55. Compare this to the actual price on CBOE or Yahoo Finance https://finance.yahoo.com/quote/KO/options on the day you complete this question.

Can you explain any reasons for the difference in prices? Use the ‘Implied Volatility’ function on the Options Calculator to infer the implied volatility based on the market price for this call option. Use the same Options Calculator to find out the Delta, Gamma, and Vega of this option. Explain how you would use that information as an options trader.

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