Posted: March 23rd, 2017

Assume you just bought 100 shares of BP stock (at \$35 per share). Use the October 35 call to write covered calls. What is your total return if the stock price falls to \$25? What is your total return if the price rises to \$45?

Complete the following options exercise.

Assume it is June, 2010 and you are awaiting clarity on BP’s fundamentals.  As an investor, you are looking at options scenarios given the unpredictable oil spill crisis and associated firm specific risk (unsystematic risk).  BP’s closing price on June 8, 2010 was 34.67.  Using the option prices shown below for the underlying security (BP), do the following:

1. Focus on the October 2010 35 call. Suppose you bought this call at the price indicated. How high must BP’s stock price rise to at expiration to break even on this option?
2. Now look at the October 2010 35 put. Suppose you bought this put at the price indicated. How low must BP’s price fall to at expiration to break even on this option?
3. Assume you just bought 100 shares of BP stock (at \$35 per share). Use the October 35 put to develop a protective put strategy.  What is your total return on the entire investment if the stock price falls to \$25?  What is your total return if the price rises to \$45?
4. Assume you just bought 100 shares of BP stock (at \$35 per share). Use the October 35 call to write covered calls.  What is your total return if the stock price falls to \$25? What is your total return if the price rises to \$45?
5. Create a straddle by buying the October 35 call and the October 35 put. What’s the maximum loss for this position and what stock price will produce it? Where will you break even? Why would an investor establish a position like this?
6. Now assume you own 100 shares of the stock your group has selected to present for the stock research project. Use  December options to develop a protective put strategy.  If the company does not have December options, use November or January options.  Select the put with a strike price nearest to your company’s trading price.  What will your total return be if your stock price falls to 0?  What if the stock price rises 100%?

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