subject derivatives and risk management groupassignment report

In this report, we look at the risk-maximizing and profit-maximizing characteristics of several options trading strategies for our portfolio such as the Bull Call Spread and the Long Str

INTERNATIONAL UNIVERSITY SCHOOL OF BUSINESS

Subject: DERIVATIVES AND RISK MANAGEMENT

Instructor: Dr Vo Xuan Hong

GROUP ASSIGNMENT REPORT

Group 3’s members:

3 BAFNIU18193 Nguyen Kieu Vy

Date of submission: January 09, 2022

Ho Chi Minh City, Vietnam

TABLE OF CONTENT

I INTRODUCTION 3

II STRATEGIES DEVELOPMENT 4

e Expectation 1: Large investment capital > Long Straddle 7

e Expectation 2: Limited investment capital > Bull Call Spread 8

IV REFERENCES 12

Wordcount: 1,975 words (excluded the Cover page, Table of Content, and References)

1 Purpose and Focus

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In this report, we look at the risk-maximizing and profit-maximizing characteristics of several options trading strategies for our portfolio such as the Bull Call Spread and the Long Straddle Stocks and options are included as standard

Our portfolio includes stock and options of Tesla, Inc Common Stock (TSLA) We use Tesla

stock and options price data from December 10, 2021, to December 27, 2021, collected from

the National Association of Securities Dealers Automated Quotation System (NASDAQ) NASDAQ is the second-largest electronic exchange in the United States today, after the NYSE Model Tesla stocks and options are roughly among the top 10 largest stocks on the aforementioned exchange

The objective of this current portfolio valuation is to evaluate Tesla stocks and options as of December 27, 2021 Therefore, our primary research question is whether the results from the following popular options strategies: Bull Call Spread, Bull Put Spread, Long Straddle, and Long Strangle will provide the highest return and lowest risk for our portfolio

To deal completely with the use of options trading strategies, we have divided our main research question into 2 expectations based on the main characteristic of investment capital The first expectation with large investment capital, we focus on the Long Straddle strategy The second expectation with limited investment, we focus on the Bull Call Spread options strategy We look at the performance of these strategies, it can be a good choice for the risk- averse investor, based on more or less capital structure

The results are presented as measures such as stock price, net debt, earnings, and expected value With stock price expectations of high volatility, we found that the Long Straddle and the Bull Call Spread were the only two strategies that generally performed better than the

other two of the four strategies above Therefore, in our portfolio review strategies section,

we focus only on these two strategies

2 Report Structure

This report is structured into three main sections After this introduction, the rest of this report

is organized as follows: Part 2 is Strategy Development, in which we will analyze and evaluate Tesla stock selection based on two focused strategies, Long Straddle and Bull Call Spread with two expectations based on investment capital The last part is the Conclusion The main sources and articles used for the data on which this report is built, which will be

mentioned in the last section References

1 Stock Selection Analysis

Tesla was chosen for the project since it is renewable energy and electric vehicle firm based

in the United States Tesla's future is bright, as the industry is an industry of the future, with products like electric automobiles, battery energy storage, solar panels, and roof tiles, and other associated products and services Tesla has been on the minds of every investor for years, and its rising stock price appears unfathomable Tesla, as a pioneer in the electric-car business, broke boundaries and overcame difficulties to reach an all-time high in its stock price Tesla's stock has climbed considerably since its IPO in 2010, with the company on track to become the most valuable automaker by the summer of 2020 Later that year, it was included in the S&P 500, a stock market index that measures 500 large companies listed on

US stock exchanges Tesla has a market capitalization of $707.49 billion, which is higher

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than the automakers With a P/E ratio of 373.68, it's no surprise that investor interest in Tesla

is at an all-time high When Tesla splits its shares in 2020 to make it more affordable, it will

be on the rise Tesla's stock price rose by 40% immediately after the announcement The goal

of a stock split is to allow investors with a limited budget a chance to participate in the action

On August 31, 2020, the 5-for-1 stock split will take effect Shareholders who get accredited

on August 21 are automatically eligible for reduced shares for each share they own There's only a fifth of the value left Nearly a year later, on September 1, 2020, the stock price was

$475.05, and on December 10, 2021, the shares ended at $1017 This demonstrates that

investors have high hopes for Tesla's future

The stock has no end in sight, with a growing market cap and a 2020 S&P entrance, and its exceptional velocity has pushed it to smash over all previous resistance levels The S&P 500

is the most prestigious US stock market index, tracking the country's top 500 firms Due to weighted recognition and reputation, companies that are added to the S&P 500 generally see

a boost in the value of their shares The fact that Tesla has joined this group of indexes demonstrates that they have a strong reputation in the market

Another feature that is piquing Tesla's attention is the prospect that its battery technology may be commercialized As of September 2020, Panasonic has funded an extra $100 million

in battery production at Tesla's Gigafactory Nevada, increasing the storage capacity of each battery by 5% Panasonic also verified that demand for Tesla automobiles is increasing, which gives investors peace of mind

Tesla's virtual power plants, which it is now testing in its energy division, are an equally intriguing area of development These have the potential to boost utility storage, particularly solar, which will address the rising problem of power outages in areas that rely on renewable

energy but suffer from continuous power outages

Individual homeowners can purchase a Powerwall that will provide backup power to their home and neighboring homes while saving money on energy bills There is a real opportunity

to scale with this product as individual homeowners can purchase a Powerwall that will provide backup power to their home and neighboring homes while saving money on energy bills Solving this challenge through distributed generation and storage is expensive and hard for the government or utility firms

According to the aforementioned data, Tesla's trajectory is the future of the new world, and investors will have high hopes for this new world As a result, for this endeavor, we chose Tesla stock Tesla's current stock price is $1017 as of December 10, 2021 In a short-term trend, we estimate this stock's price to rise with a high chance

2 Hedging

As a strategy with limited downside obviously adding an additional cost, which means investors need to buy the extra options to hedge against extreme events We are expecting the use of implied volatility will improve the profitability of the strategies Then, with the expectation of future fluctuations in stock prices, we choose 2 strategies including Long Straddle and Bull Call Spread, which will be applied to the portfolio based on our investment budget

e Expectation 1: Large investment capital > Long Straddle

First, with big enough capital, we want to make sure that the risk of our investment is under

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control The reason why we choose the long straddle strategy is that it will guarantee any significant changes in stock prices, either up or down direction Especially, the last month of the year is a time when the company does marketing activities to promote consumption and many situations could send the stock price sharply fluctuating, so it was great to purchase straddles before new product introductions and before FDA announcements

On December 10, 2021, Tesla’s stock price was recorded at $1017.03 With the expectation that stock prices will experience a significant change and are likely to be sharply higher, we chose the straddle with the combination of a call and a put with the same expiration month and the same strike price of 1035 As we anticipated a large rise in stock prices, we decided to purchase a call and put with the premiums being 40.15 and 0.02, respectively As a result, we accepted the net debt of 4017 for a straddle Therefore, at the expiration date, we expect that the profit on the upside is as theoretical, which will be unlimited because of the long call

1017.03 1.093,94 78,95 995 0,01 1017.03 1.093,94 0,01 1105 38,2

> Evaluation of the performance at the expiration date (Dec 27th)

The share price of Tesla on December 27th is recorded at $ 1,093.94 At that price higher than

the strike price of the purchased options, we will exercise the call option at maturity, which will be profitable at a gain of $ 5,894 On the side of the put option, we will not exercise it and accept the loss of the premium Therefore, the expected value of the straddle is equal to the value of the spread minus net debit, which is $ 1,877 gain at the expiration date

990 1.093,94 8472 10394 0 10394 1922

995 1.093,94 7896 9894 0 9894 1998

1000 1.093,94 7534 9394 0 9394 1860

1005 1.093,94 6819 8894 0 8894 2075

1010 1.093,94 6001 8394 0 8394 2393

1015 1.093,94 5573 7894 0 7894 2321

1020 1.093,94 5371 7394 0 7394 2023

1025 1.093,94 4988 6894 0 6894 1906

1030 1.093,94 4450 6394 0 6394 1944

1040 1.093,94 3728 5394 0 5394 1666

1045 1.093,94 2962 4894 0 4894 1932

1050 1.093,94 2573 4394 0 4394 1821

1055 1.093,94 2182 3894 0 3894 1712

1060 1.093,94 1918 3394 0 3394 1476

1065 1.093,94 1670 2894 0 2894 1224

1070 1.093,94 1500 2394 0 2394 894

1085 1.093,94 1711 894 0 894 -817

1090 1.093,94 2430 394 0 394 -2036

e Expectation 2: Limited investment capital > Bull Call Spread Based on the preceding analysis, we believe Tesla's stock price will go up As a result, we prefer to make long calls However, because our budget is limited, we chose to adopt the bull call spread strategy to lower the cost of investing in call options If we buy a call option with

a strike price of 985, we will initially spend $9,075 on it Instead, if we also sell a call option with a strike price of 990, we will make more profit As a result, we are only going to spend

$605 for two pairs of rights long and short In addition, we can obtain a premium when we

short a call

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On December 10, 2021, the stock price was $1017.03 We anticipated a large rise in Tesla's price, so we purchased a call option with a strike price of $1085 and sold a call option with a strike price of $1090 Because the call option's price at the strike prices of 1085 and 1090 is just $2.51 and $1.9, respectively As a result, we won't put too much money into the call options (Net debt = $0.61/shares)

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1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94 1.093,94

Exp Date 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec 27-Dec

> Results of using Bull Call Spread Strategy:

Premium 90,75 84,7 78,95 75,33 68,15

60 55,7 53,7 49,73 44,47 40,15 37,27 29,6 25,72 21,8 19,17 16,65 12,65 7,51 5,4 2,51 1,9

Strike

985

990

995 1.000 1.005 1.010 1.015 1.020 1.025 1.030 1.035 1.040 1.045 1.050 1.055 1.060 1.065 1.070 1.075 1.080 1.085 1.090

The share price as of December 27, 2021, is $1093.94 per share For a long position, a call with a strike price of $1085/share will be profitable (Gain = (1093.94 - 1085)*100= $894/call option) For a short position, a call with a strike price of $1090/share will suffer a loss due to

strike price < stock price (Loss = $394/ call option) From there, the value of spread = long +

short (= 894 - 394= $500)

> Bull Call Spread Profit/Loss = Net Debit + Value of Spread = $500 - $61 = $439

(GAIN)

Net Debit Long Call Profit/ (Loss) Short Call Profit/

1.093,94 -61 894 (394) 5s00G%Ẳ%

We used Tesla stock and options prices from December 10, 2021, to December 27, 2021, to

evaluate our portfolio and the performance of each options trading strategy Based on the data

we mentioned above, Tesla's stock price is estimated to be likely to increase We conclude that the Long Straddle and Bull Call Spread strategies are overrated compared to several

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