The purpose of the project is to familiarize both the pricing and the actual trading of the option contracts. This project consists of the following: Select a period of 05/18 to 06/12 for your analysis.
Then do the following:
a. Prepare a computer graph of traced (1) daily 3-month T-bill rate,
(2) daily S&P 500 index (SPX), (3) daily index option (use call
option with exercise price at 2,960 and expire on June 12, get quote
from http://cboe.com/DelayedQuote/QuoteTable.aspx or
www.cme.com ) and at least one stock option during the period
(assume 2% dividend for S&P index (SPX) and then use B/S option
model to obtain the missing call premium (only if no trade data)
b. Table the traced daily implied volatility and the daily hedge ratio
(the delta) of the S&P 500 stock index and stock options [i.e., use
the same option on (3) in a] over the period.
c. Estimate the historical standard deviation of S&P 500 index and the
chosen stock in (3) in a.
d. Construct a bull money (two calls with two different exercise
prices), a butterfly (three calls with three difference exercise
prices), and a straddle (buy a call and buy a put with the same
exercise price) on 05/18 using a stock option. Close the position on
06/12. Track the daily profits and graph the results. Identify the
breakeven point(s) if you hold until the maturity and maximum and
minimum profits during this period.
e. Construct a table to record (1) daily stock (or index fund with its
options traded in the market) price start on 05/18, (2) its daily sell
Put price with exercise price lower or equal to the stock price on
05/18 expire on June 12, (3) its daily Call price with exercise price
higher than (or equal to) the stock price on 05/18 expire on June
12, (4) buying a call price and selling a put price with the same
exercise price equal (or close to) to the stock price on 05/18 expire
on June 12.
Check the WSJ to get the option premiums and the appropriate interest rates.
Written Report must contain the following: 1.Title page: Your name, course #, term and date, and instructor’s name.
2.Introduction: Briefly describe your project and what you learn from the project. Briefly describe the CBOE market in terms of size and growth, participants and structure.
3.Option strategies: Display all calculated results in a table. Graph all calculated results. Detailed discuss and analyze the calculated results (what and why). For example, specify any significant information occurred triggers the change of profit (or loss) changes, why the implied volatility differs from the historical standard deviation, etc. Compare and explain the results of trading strategies tabled in section e. What is your recommendation of the investment strategy and why?
4.Analysis: Discuss, compare and analyze the speculation and hedge results on trading options. Analyze, discuss, and comment the hedge effectiveness for various hedging strategies.
5.Conclusion: Summarize what you found and learn in this project.
6 References. The results of your project will be summarized in a type-written term paper.
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