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OPTIONS – PROBLEMS TO BUILD CONCEPT UNDERSTANDING 1. Option Function: a. What happens if a long call is exercised? Explain. b. What happens if a long put is exercised? Explain. c. What happens if a short call is exercised? Explain. d. What happens if a short put is exercised? Explain. 2. Intrinsic and Extrinsic Value: Look at the following table and compute intrinsic and extrinsic values: UNDERLYING PRICE OPTION PRICE INTRINSIC VALUE EXTRINSIC VALUE Acadia Pharma (ACAD) $26.80 18 Apr 2019 25 call $3.20 Netflix Inc. (NFLX) $360.31 17 May 2019 380 put $35.85 Proctor & Gamble Co. (PG) $98.97 5 Apr 2019 95 call $4.85 IBM (IBM) $138.12 5 Apr 2019 137 put $2.19 Pure Storage Inc. (PSTG) $20.50 17 May 2019 22.5 call $1.05 ZScaler, Inc (ZS) $49.68 20 Dec 2019 50 call $9.70 ZScaler, Inc (ZS) $49.68 20 Dec 2019 50 put $9.80 3.1 Delta: a. An option is trading at $3.45. If it has a delta of .78, what would the price of the option be if the underlying increases by $.75? What would the price of the option be if the underlying decreases by $.55? b. What type of option is this? Explain your answer. c. With a delta of .78, is this option ITM, ATM or OTM? Explain your answer. 3.2 Delta: a. An option is trading at $5.03. If it has a delta of -.56, what would the price of the option be if the underlying increases by $.75? What would the price of the option be if the underlying decreases by $.55? b. What type of option is this? Explain your answer. c. With a delta of -.56, is this option ITM, ATM or OTM? Explain your answer. 3.3 Delta: Look at the following chart. Rank the options in terms of moneyness, from deepest ITM to deepest OTM. Option Type Delta A Call .89 B Call .12 C Put -.75 D Call .16 E Call .35 F Put -.50 4. Extrinsic Value: Look at the following chart. Rank the options in order of expiry, from nearest to farthest. UNDERLYING UNDERLYING PRICE STRIKE/TYPE OPTION PRICE INTRINSIC VALUE EXTRINSIC VALUE A SPY $278.68 280 call $11.70 B SPY $278.68 280 call $14.69 C SPY $278.68 280 put $12.39 D SPY $278.68 280 call $27.44 E SPY $278.68 280 put $8.73 F SPY $278.68 280 put $14.83 G SPY $278.68 280 call $4.14 5. Theta:An option has a theta of -.08. If it has a price of $2.58 today, what will its price be tomorrow, all else being the same? Explain. 6. Theta: Option A has a theta of -.10 and Option B has a theta of -.05. Which option is expiring first? Explain. 7. Theta: Look at the following chart. Rank the options in order of expiry, from nearest to farthest. UNDERLYING UNDERLYING PRICE STRIKE/ TYPE OPTION PRICE THETA A SPY $278.68 280 call $1.00 -.07 B SPY $278.68 280 call $14.69 -.02 C SPY $278.68 280 put $12.39 -.03 D SPY $278.68 280 call $27.44 -.02 E SPY $278.68 280 put $8.73 -.04 F SPY $278.68 280 put $14.83 -.03 G SPY $278.68 280 call $4.14 -.04 8. Gamma: Look at the following chart. Based only on this information, which underlying equity is the riskiest (highest 2)? UNDERLYING PRICE STRIKE/ TYPE OPTION DELTA OPTION GAMMA A $139.20 139 call .51 .09 B $137.47 137 call .54 .06 C $137.75 138 put -.50 .06 D $138.35 138 call .54 .10 9. Gamma: Look at the following chart. Based only on this information, rank the options in terms of moneyness, from deepest ITM to deepest OTM. UNDERLYING PRICE TYPE OPTION GAMMA A $138.35 call .13 B $138.35 call .06 C $138.35 put .08 D $138.35 put .10 10. Gamma: An option is trading at $5.26, has a delta of .52, and a gamma of .11. what would the delta of the option be if the underlying increases by $.75? What would the delta of the option be if the underlying decreases by $1.05? Explain. 11. Vega: An option is priced at $3.20 and has a vega of .10. If the implied volatility of the option is 25%, what would the option price be if the volatility of the underlying increases by 1%? 12. Vega: A stock is about to announce earnings, and the option has begun to increase in price, even though the underlying price hasn’t changed. Why is this happening? 13. Vega: Look at the following chart. Based only on this information, rank the options in terms of moneyness, from deepest ITM to deepest OTM. UNDERLYING PRICE TYPE OPTION VEGA A $138.35 call .13 B $138.35 call .06 C $138.35 put -.08 D $138.35 put -.10 14. Delta Neutrality: Based on the stock portfolio below, use options to build a delta neutral portfolio, keeping the long equity positions as is. NOTE: If an option is a short call or a long put, be sure to remember that these positions have negative delta. UNDERLYING PRICE OPTION PRICE OPTION DELTA 400 Acadia Pharma (ACAD) $26.60 18 Apr 2019 25 call $3.70 .65 30 Netflix Inc. (NFLX) $357.32 17 May 2019 380 put $36.95 -.60 100 Proctor & Gamble Co. (PG) $98.44 5 Apr 2019 95 call $4.35 .75 75 IBM (IBM) $139.20 5 Apr 2019 137 put $4.30 .61 500 Pure Storage Inc. (PSTG) $20.86 17 May 2019 22.5 call $.95 .38 165 ZScaler, Inc (ZS) $60.80 20 Dec 2019 50 call $17.70 .75