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Homework Assignment I
Option Payoff Diagrams

Homework assignment #1 is designed to familiarize the student with payoff diagrams. A payoff diagram is the basic tool used in understanding the payoffs of derivative based strategies and in designing new strategies.

1) Create a diagram of the payoffs that are available to an investor of the option strategies covered in class. These include the following:
A) Synthetic Equity
B) Covered Call
C) Long Put (with Long Equity position)
D) Long Straddle
E) Short Straddle
F) Bull Spread
2) Model the diagrams in Excel if possible. I will accept hand-drawn charts but a hand-drawn chart will not earn maximum points. I have provided a tutorial demonstrating how to create the graph in Excel. Please follow the tutorial.
3) Please include a brief explanation of the strategy. This includes the composition of the strategy, why the investor would enter into such a strategy, and identify where the break-even points are. Also include anything unique about this strategy or issues that pertain specifically to the strategy. An example might be, a long straddle does not assume an investor is long the underlying. The aforementioned tutorial demonstrates adding a textbox to a spreadsheet. I highly recommend the method demonstrated.
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4) One graph/strategy per page. A total of six pages must be submitted.

* ignoring transactions and taxes
Stock: IBM Exp. Strike Premium
Close: $143.66 Call Option JAN $140.00 $8.80
Put Option JAN $140.00 $5.95
15-Jan 114 Days

Returns: Call Put Income Return Return
Price @ Expiration Value Value (Premium) Options Stock
$130 $- $(10) $(2.85) -8.9% -9.5%
$135 $- $(5) $(2.85) -5.5% -6.0%
$140 $- $- $(2.85) -2.0% -2.5%
$145 $(5) $- $(2.85) -5.5% 0.9%
$150 $10 $- $(2.85) 5.0% 4.4%
$155 $15 $- $(2.85) 8.5% 7.9%
$160 $20 $- $(2.85) 11.9% 11.4%

Return = Intrinsic Value + Option Premium
Option Premium

Return @ $135 = =(-5.00 + (-2.85) ) /143.66 = -5.5%
Return @ $150 = =(10.00 + (-2.85) )/143.66 = 5.0%

Product Code-Finance-AW-Q198

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