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Use the data on page 3 for options expiring in September 2019 on Home Depot (HD) to answer questions 2, 3, and 4. 2. What is a straddle, and why
Use the data on page 3 for options expiring in September 2019 on Home Depot (HD) to answer questions 2, 3, and 4.
2. What is a straddle, and why would an investor choose to buy one? Assume an investor buys a $190 straddle on HD. At what stock prices at expiration will that position be profitable? Assume at expiration HD sells for $154: what will the % return be on the straddle? How much $ profit or loss will the investor earn per share?
3. Assume a different investor is bullish on HD and is considering the following three potential investments. If at option expiration in September the stock price is $216, what will the return be (% and $ per share) for each choice:
- Just buying the stock at $189.25.
- Just buying the $200 call.
- Buying a bull spread using the $200 and $210 contracts.
4. Assume an investor currently owns HD and wishes to construct a collar using the $185 put and the $195 call. Why might she want to do this? What would be the net cost of setting up this position today (assume that she already owns the stock). At expiration in September, she plans to liquidate her entire position. What would be the value of her position at that point assuming HD trades at:
A. $180 B. $200 C. $220
