1) You are concerned that Trump administration tariffs on China’s exports will provoke further retaliatory tariffs, and may spur a trade war. You want to bet on this price change using a vertical bear spread. Use the calls below on November 2018 Soybean Futures below to bet on lower prices and reduce the risk of loss.
Call with a strike price of $10.40 and a premium of $0.45
Call with a strike price of $12.40 and a premium of $0.16
a) Explain the position you would take and calculate your maximum loss and maximum profit.
b) Draw the payoff diagram for the vertical spread.
2) You are concerned that faltering NAFTA renegotiations could jeopardize U.S. exports of cheese to Mexico. You think that current options prices are too cheap, since you believe prices will be more volatile than implied by the options prices. Using the information below on ATM options contracts for May 2018 Cash-Settled Cheese futures, assemble a straddle that will profit if you are correct that there is more volatility in the market than is currently priced into the options.
Current futures price: $1.546/lb
$1.550 call premium: $0.31
$1.550 put premium: $0.35
a) Explain the positions you would take to speculate based on the belief above.
b) Find the price range(s) over which this belief would be profitable as well as your maximum profit and maximum loss.
c) Draw the payoff diagram for the straddle. For this payoff diagram, include both of the options positions as well as the combined position.