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Case Study: Calipso Capital Consultants

Calipso Capital Management (CCC), the investment management firm with offices throughout Ohio, is headquartered in Cincinnati. CCC generally actively manages accounts for high-income individuals with assets of $500,000 or more. Peter Myers, managing director of CCC, thought increased interest of clients in security options required more than routine advice as he knew that many clients did not fully appreciate the risks and hedging aspects of buying and selling puts and calls. He had personally spent many hours describing the vocabulary and technical trading aspects of option vehicles to clients who found the area exciting but none the-less arcane.

                            EXHIBIT 1        
          Bio-Genetics Corp. Option Quotes    
STOCK PRICE: 162                    
                             CALLS                 PUTS
PRICE  APR     JULY     OCT     APR      JULY
140      23                
150      16       21        25         1          4
160       9        14        20         3          7
170       3         9         13         9         10
180       1         5          9                     20

Note: Blank spaces denote option not offered or not traded.

Janet Barnes joined the firm three months ago after spending one year in Dean Witter's training program in Cleveland. She received a broad training with emphasis in options and futures instruments. Myers though Barnes would be an important member of the firm in its dealings with clients interested in securities options.

The first task that Barnes faced was preparing an analysis of various strategies in the options of Bio-Genetics Corp., a company about which a young dentist in Berea had called. The dentist owned the stock and wanted to explore various strategies to either hedge or enhance his position.
Data provided in Exhibit 1 relate to key information on Bio-Genetics puts and calls. Bio-Genetics stock is currently at 162, pays no dividends, and has a beta of 1.3. The volatility of the stock is estimated at 30 percent. The rate on two-month Treasury bills is 6 percent.

Case problems:

1. Which options are in-the-money? Which are out-of-the-money?                 

2. find out margin requirement for a short position in the Apr/140 call option.     

3. Compute commission for the purchase three July/170 puts.               

4. Why are investors willing to pay1 for the Apr/1S0 call and also the Apr/150 put, which is closer to the current market price?                            

5. Suppose April options expire in one month. Are the Aprill160 calls fairly valued? Describe.                                              

6. Suppose client is holding 100 shares of Bio-Genetics common long at 162.

Advise client on the relative advantages and disadvantages of selling a call against this position using:

(a) Apr/170 versus

(b) July/150 calls

Business Management, Management Studies

  • Category:- Business Management
  • Reference No.:- M93146

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