Option strategy


A client came to you asking for your advice to create an option strategy that will provide the payoff
structure using certain options on Tesla’s stock. The options should expire in 1 month. The payoff structure
and the required type of options will be determined for each group separately and is available on LMS in
the “Final Project” folder.
Your task is to create a strategy that meets the client’s needs using a combination of the options as
specified in the payoff structure file for your group.
i) Explain how your client can create the required strategy using options (i.e., what is the mix of
options you need for this strategy).
ii) Using a five-step binomial tree approach and showing the inputs you used in your calculation,
calculate this strategy’s cost (or net premium received). Assume the rf is 1.5% with quarterly
compounding. Refer to the CME to obtain Tesla’s implied volatility.
iii) Draw the payoff and profit (loss) diagram.
iv) Based on the prices you calculated for the options, at what price (or prices) of the underlying
stock will the strategy breakeven?
v) What assumptions did the client make that motivates the creation of this strategy?


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