FINA 4320 - FINAL PROJECT
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FINA 4320 - FINAL PROJECT
Due Date: 11:59 pm May 4, 2023
Instruction: Submit ONE Excel file that contains all the models (including the trading strategies). You can either have ONE more scanned document or Word to answer the questions.
You’re a stock option trader at Peachtree Trading, a boutique investment firm based in Atlanta. Your focus is on the technology sector. Over the past year, there have been significant market adjustments in the market overall and especially in the technology sector. S&P 500 is down 3.78% and NASDAQ 100 Technology Sector Index is down 6.51%. Facing an uncertain global economy and slowing revenue growth, technology companies have made headlines on their layoff activities in 2023: 597 tech companies have laid off 171,660 staff so far this year. Your manager was concerned about the market uncertainties in the technology sector and consulted you about your trading strategies. You stated firmly: “More volatility signifies more trading opportunities.”
1 STOCK OPTION STRATEGY
Just last Friday (April 21, 2023), you received the news that Lyft (LYFT) plans to “significantly reduce” its workforce: the company’s new CEO David Risher told employees that there will be another round of layoffs as it struggles to turn a profit and pull off a turnaround. The announcement follows Lyft’s move in November to cut 13% of its workforce, citing fears of a looming recession. The Wall Street Journal reported that the latest job cuts would eliminate at least 1,200 positions or upward of 30% of its staff.
Knowing that layoff decision would potentially amplify Lyft’s stock volatility in the next weeks and even months, you want to form option trading strategies to take advantage of this uncertainty. You know that Wall Street has gener- ally applauded downsizing decision. Companies such as Meta have soared 81% this year after losing about two-thirds of their value last year, using layoffs decision as a positive signal to the market. Lyft, however, is not so successful in using this strategy, evidenced from its November cuts of 13% of its workforce.
Answer the following questions:
(a) Analyze Lyft’s decision to cut its staffs by 30% and the predict the im-
pact that the decision will have on Lyft’s stocks in the next few months (direction or volatility or both) (hint: see how price moves in the next few days following this news)
(b) Following your expectations, modify the Excel payoff file in class to form
two trading strategies: one with zero chance of negative payoffs, and one with chances of negative payoffs. Use options that would expire in July 21, 2023. Options information can be taken from Yahoo Finance’s Lyft Options.
(c) Explain the trade-offs between the cost of forming the strategies (cost of buy and/or sell the options to initiate the strategy) and the benefits you get from the strategies (how risky the payoffs are of each strategy)
2 OPTION PRICING
As a prudent trader, you would like to make sure that the options are correctly priced before making the trades. Thus, you’d like to employ the models that you learn from Derivative class to make this assessment. From the Yahoo Finance’s Lyft Options that expire in July 21, 2023:
Answer the following questions:
(a) Pick two options: One call and one put with the same strike price in which
the call option is out-of-the-money
(b) Assume the options provided are all European options, modify the Excel
models in class to price both the call option and the put option using
• Binominal Model
• Black Scholes Model
• Monte Carlo simulation
Use the implied volatility provided by Yahoo as the volatility of the com- pany. Risk-free interest rate (use March 2023 rate) can be taken from
(c) Compare the results among the three models and the actual option prices and explain if there is any difference.
2023-05-06