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Options Traded on Legal and General August 14 2009

Share Price Exercise Price Calls Puts

Sep Dec Mar Sep Dec Mar

65.90 64 4.50 7.75 9.75 3.50 6.75 8.75

68 3.50 5.75 7.75 5.75 8.75 10.75

a) Draw a profit diagram for an investor in a call option with an exercise price of 64 that expires in March and explain the diagram. Undertake the same analysis for the writer of the call. Comment on the contention that options are a zero sum game for the writer and investor in options.

b) Explain carefully why the March calls are trading at higher prices than the December calls.

c) Draw a diagram illustrating a straddle, using calls and puts expiring in March and an exercise price of 64. Explain why an investor might consider it worthwhile to invest in a straddle and comment on the expected profitability of such an investment.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M9523684

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