Bus 316 Assignment- 4

Protective Put and Covered call:

Volatility of Nokia= 45.5% and Volatility of Uber = 45.2%. The screenshots below suggest Nokia
is more likely to decline as it has higher volatility. So, we are going to use Protective put strategy
for high volatility assets with momentum trends that is Nokia. (UBER Implied Volatility Chart
Uber Technologies, n.d.)

Protective Put (Long Put Option on Nokia): We are expecting higher volatility in Nokia’s
prices. As protective put strategy benefits from momentum, I have decided to buy put option on
Nokia. A protective put is a risk-management strategy using options contracts that will guards
against a loss and provides a downside protection from an asset's price declines.

Contract size: 10 contracts (100*10)

Strike Price: $5.5
Option Price: 0.1500
Commissions: 119.98

Direction Size Asset

Long 1,000 Nokia shares
Long 10 NOK 17SEP21 0.15P
size of 1 put contract = 100 options
The strategy was successful as Total payoff= $355.87. The increase in the price of the put
option put option becomes more valuable and it has reduced the loss on this equity position.

Risk related to Put strategy: When the stock price rises, the long-put decreases in price and
incurs a loss. The risk is limited during the life of the put and a long put is limited by time, not
stock price. The disadvantage of buying a put is that the total cost of the stock is increased by
the cost of the put.
Put strategy involves low risk but high reward. Puts can also be bought to hedge downside risk
in a portfolio.

Covered call (Short OTM Call Option on Uber): I have decided to short call option on Uber as
covered calls benefit from reversals. A covered call is created by holding a long position in
Uber’s stock and then selling 10 call options. A covered call will limit our upside profit also it
does not offer much protection if the price of the stock drops.
Contract size: 10 contracts (100*10)
Strike Price: $42.5
Option Price: $7.10 (premium)
Commissions: $70.78
Settlement date: Sep 17, 2021.

The choice of Strike Price and expiration date: I have decided to go with September 17,
2021, as expiration date because the price of an option subjects to time component, 3-month
option is more valuable than a one-month option because with more time, the probability of a
price move in your favor increases, and vice versa.

Strike prices: An ITM call may be less risky than an OTM call, but it also costs more. Here, we
are choosing call option strike price at or below the stock price. A put option strike price at or
above the stock price is safer than a strike price below the stock price.
Protective Put (Long Put Option on Nokia): We are expecting higher volatility in Nokia’s
prices. As protective put strategy benefits from momentum, I have decided to buy put option on
Nokia. A protective put is a risk-management strategy using options contracts that will guards
against a loss and provides a downside protection from an asset's price declines.

Contract size: 10 contracts (100*10)

Strike Price: $5.5
Option Price: 0.1500
Commissions: 119.98

 Here, we have purchased 1000 shares of Nokia stock for $5.42 per share. The price of
the stock increased to $5.78 and taking commissions into account giving us $210 of
gains.

We bought a put option with a strike price of $5.5 for 15 cents. The put option expires in
three months. If the stock falls back to $5.42 or below, the gain on the put option from
$5.5 and below on a dollar-for-dollar basis. In short, anywhere below $5.5, the contract
is hedged until the option expires.

 The option premium cost is $1.5 (0.15 x 10).

Initial investment = $55. Now, price is greater than strike price and the put option
expires worthless, and the investor loses $55 (5.5*10) - $1.5 = $53.5

Risk related to Put strategy: When the stock price rises, the long-put decreases in price and
incurs a loss. The risk is limited during the life of the put and a long put is limited by time, not
stock price. The disadvantage of buying a put is that the total cost of the stock is increased by
the cost of the put.
Put strategy involves low risk but high reward. Puts can also be bought to hedge downside risk
in a portfolio.

Total payoff = -$96.93. here, the payoff is lower than if we have traded stock only position since
there was a change in the stock price. Covered calls works better if price does not move much.

The choice of Strike Price and expiration date:

Expiration date for covered call: I have decided to go with September 17, 2021, as expiration
date because the price of an option subjects to time component, 3-month option is more
valuable than a one-month option because with more time, the probability of a price move in our
favor increases, and vice versa. Considering liquidity in account – the longer the expiration, the
less liquid the options usually are.
Strike price for Covered Call: We are choosing the strike which is closest to our expected
underlying price at expiration date. Because that will provide the maximum premium, reducing
our break-even point and maximum risk the most.

Protective Put Strike Price: this is based on our risk tolerance. I have considered a put option
strike price at or above the stock price is safer than a strike price below the stock price.

Expiration Date: I have decided to go with September 17, 2021, as expiration date. Taking
liquidity into account, Options with shorter time to expiration are generally more liquid.

Screenshots:
 References

UBER Implied Volatility Chart Uber Technologies. (n.d.). MarketChameleon.com. Retrieved July

19, 2021, from https://marketchameleon.com/Overview/UBER/IV/.