An option-trading strategy has a gross payoff that is depicted by the purple line in the diagram below.

Which of the following describes the component legs of this option-trading strategy?

This question can be answered by using your intuition.

In the lecture, we constructed a long straddle on AAPL as follows:

• one long call with strike $170 at a premium of $8.94
• one long put with strike $170 at a premium of $10.52

Constructing the payoff table as instructed in Lecture 7, you can see that the breakeven points for this long straddle are $19.46 either side of $170 (that is, $150.54 and $189.46).

A long straddle is "neutral" to the direction of AAPL price movements. The slope of the payoff diagram is the same in the positive and negative directions.

In contrast, a long strap is also an option-trading strategy that profits from a big price movement in either direction, but the profits are larger for up movements.

To see this, apply the calculations of the payoff table as instructed in Lecture 7 on the following long strap:

• two long calls with strike $170, each with a premium of $8.94
• one long put  with strike $170 at a premium of $10.52

 what are the breakeven points for this long strap? That is, at what share price does the long strap have a zero net profit?

The S&P/ASX200 market index is currently 6800. You predict that the market will rise substantially in coming weeks and are prepared to speculate on this prediction.

You enter 30 long call options written on the S&P/ASX200 index. The options have a strike price of 7100.

On the expiry date of these options, the S&P/ASX200 index sits at 7500.

What is the gross payoff (in dollars) on your index option speculation?

Note that S&P/ASX200 index

options have a standard multiplier of $A10.  Do

You manage a share portfolio currently worth

$30m Australian dollars. The beta of this portfolio is 0.85.

Index put options trade on the S&P/ASX200

index with a strike price of 7200.

Calculate the

number of index put options required to fully hedge this share portfolio.

Note that S&P/ASX200 index

options have a standard multiplier of $A10. Round your answer to the

nearest whole number.

A few weeks ago, you realised that you were

exposed to movements in the price of oil. At that time, you hedged this exposure by entering

a long call option written on oil.

The call option had a strike price of $90

per barrel. At the time of the option expiry, the spot price of oil is $85 per

barrel.

Hedging with options gives you a degree of

flexibility. What is the rational decision to make at expiry?