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If we compare our Bear and Bull spreads to short and long stock positions respectively we can actually show how options are highly levered financial instruments, increasing profits, but also losses tremendously. If we had shorted a Cataracts stock our profit from the price decline would have been 6. 50% per share, while with our Bear Spread we made a profit of ten times the cost of building the spread. We will write a custom essay sample on StockTrak or any similar topic only for you Order Now On the other hand, If we had held a Nikkei stock we would have had a loss of 6. 27% per share from the price cline, whereas our loss with the bull spread was 74. 8% if we compare it to the cost of building the spread. This figures show how option trading is cheaper relative to stock trading, but profits or losses are much higher in percentage terms. For our Butterfly, Strangle and Straddle strategies we chose Pfizer, which based on our analysis, presented Itself as a very stable stock, with a 6-months average price of $30. 66 and a current price of $31. 12 (March 13th). We wanted to bet on very low volatility and make a profit from very low fluctuations from Pfizer stock. Our Butterfly parade consisted on shorting two 32-strike calls and taking a long position on 31- strike and 33-strike calls. The center strike price of our butterfly was the exercise price of the Straddle and also lied exactly in the middle of the $31. 5-strike put and $32. 5-strike call for our Strangle. In the end, our Butterfly spread turned out to be for our spread (see Graph 3). 2. ) The article posted referrers to â€Å"covered call writing† as taking a long position on stock and writing a call that is significantly out-of-the money. With his strategy, if the call option is exercised and the investor has to sell his hares, he is covered by holding the underlying. If we compared the covered call strategy to a short naked call we can clearly see that the risk for the naked position is unlimited if the price of the stock increases. With the covered call, by going long on the underlying, we cap our profit but we also limit our loss, whereas with the naked short call we are completely exposed. The analog position using puts, I. E â€Å"covered put writing† would mean writing a put and shorting the underlying. To execute such a strategy is possible, but the risk embedded in it is very high, because the potential asses from a price increase in the stock are unlimited. The premium gained from the put writing might not be large enough to cover the losses from the short position if the price increase is high. 3. ) For our collar strategy we selected Apple stock. To execute such a trade we bought 1,000 shares at $527. 49, went long one thousand 535-strike puts and shorted the same number of 540-strike calls; both option contracts expired on April 25. Our collar was as close to zero as possible, where the put options had a price of $16. 5 and the call options were priced at $17. 25. If the rice of Apple had stayed between the two designated strikes, our profit would have been the value of the stock plus the $0. 75-differential between the option prices. At maturity Apple closed at $571. 94, meaning that the call option was exercised and we lost $41. 94, but we also gained $44. 45 on the price appreciation of the shares, leaving us with a net profit of (44. 45 – 41. 94 + 0. 75) $3. 26 per share. 4. To execute the stop- loss and delta-hedge strategies we wrote 100 at-the-money call option contracts on Backbone and Google. Our initial position to hedge both strategies was long the hares of both companies. For Backbone we used the stop-loss strategy and set arbitrary times to check our positions and hedge it. The initial cash inflow of shorting these options was $35,500 and the cost of hedging this position went up to $174,312. 51. On the other hand, with the Google options we used the delta-hedge strategy and checked the stock price 3 times a day. The initial cash inflow from shorting the calls was $54,000 and the costs related to hedging reached a total of $1 The amount spent for hedging the FEB.. Shares was 5 times larger than he value of the options we sold, while for Google the ratio was 20 to 1 . After seeing these figures we can observe that hedging strategies are extremely costly, but are essential to protect short positions against risk and prevent higher losses. 5. ) To create the â€Å"synthetic† rep we bought Gold at spot price of $1,296 on March 27 and shorted Gold futures expiring in April; the average of the ask and bid prices for this contract was $1 ,302. Executing this transaction, we locked in our prices for a return of 0. 463%. The I-month treasury bills from the U. S. Federal Reserve website is quoted at 0. 0167%, which is essentially 0%. Comparing the return rate from our futures contract with the I-month T-bill rate, there is an arbitrage opportunity. To exploit this opportunity we would borrow money at the T-bill rate of and use it to buy gold at the spot price, in addition to these transactions, we would short Gold futures to make a final profit of 0. 613%. 6. ) current pence of BIBB: $ 290. 54 price of put @ 290: 10. 30 price of call @ 290: 13. 00 Deep in the money calls: price of call 0280: 9. 40 pence of put 0280: 5. 42 Deep in the money puts: price of call @300: 7. 72 pence of put 0300: 16. 8 If we look at at-the-money options and, considering that the risk free rate is essentially zero, the stock price and the present value of the strike price are practically equal, so in order for UT Call Parity to obey, the put and call price should be identical. As we can see in the quoted prices above, parity doesn’t hold; the call price is higher than the put. We could exploit this opportunity by going long on the put and the share, shorting the call and borrowing the present value of K. When it comes to deep in-the-money calls the share price is higher than the present value of K, so the call price should be higher than the put price by the same amount as the price differential between S and IV (K). We can see from the prices above that the call is undervalued in relation to the put. To exploit this arbitrage opportunity we would buy a call, invest IV (K) and short the put and the share. Finally, for deep in-the- money puts, the share price is lower than the present value of K, so the put price should be higher than the call price by the same amount as the price differential between S and IV (K). We can see that the put is undervalued in relation to the call. To exploit this arbitrage opportunity we would buy the put and the share, borrow IV (K) and short the call. 7. When looking at the overall performance of our portfolio and its relative risk we can conclude that it was much riskier relative to the S and also had a lower return. If we look at the summary figures of our portfolio we can see that it had an overall return of 0. 63%, whereas the SPY IETF had a percentage return of 1 . 19% (see Graph 4). We believe that the reason for the lower return and higher risk of our portfolio comes from several trades involving silver and platinum futures entrants that we p erformed to experiment with the platform and observe how these contracts behaved. In general we think that such a project is a very useful and enjoyable way to get to know the trading world. Performing actual trades allowed us to â€Å"get our hands dirty’ and truly understand how to build spreads and implement investment strategies. This project gave us the opportunity to go beyond the theory and realize that trading can sometimes be more complicated that it seems on paper, but can also become much clearer once the theory is implemented in a â€Å"real world† setting. We very much enjoyed working on this project. How to cite StockTrak, Papers