Derivatives and Financial Markets

TOPIC: Option Strategies

READINGS:
• “WorldCom Director Uses Exotic Play to Hedge Stake” (Separate Distribution)
https://www.lib.uwo.ca/cgi-
bin/ezpauthn.cgi?url=http://search.proquest.com/docview/398807710?accountid=15115

• “20-Year-Old Robinhood Customer Dies By Suicide After Seeing A $730,000 Negative

Balance” (Separate Distribution)
https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-year-old-robinhood-customer-
commits-suicide-after-seeing-a-730000-negative-balance/#7dd526e05928

Ø Related textbook reading: Chapter 11, Section 11.3 (focus on “Bull Spreads”). Read
the rest of chapter 11 as well.

ASSIGNMENT:
A. WorldCom Director:
1. What is a collar? How can it be structured and priced? What is a zero-cost collar?
2. How should investors interpret options trades by company directors like WorldCom’s
McCourt?
3. If the two strike prices in the collar were set to be equal, say at $40, would the value
of the collar continue to be zero? Is there a particular strike price that would ensure
the value of the collar to be zero? (Hint: use put-call parity condition and assume
WorldCom is a non-dividend paying stock.)

B. Robinhood Customer:
“The note found on his computer by his parents on June 12, 2020, asked a simple
question. ‘How was a 20 year old with no income able to get assigned almost a million
dollars worth of leverage?’

Use the example of Amazon options in the article to describe what might have happened.
Write down algebraically (in a table), the initial cost and the payoff and profit/loss at
maturity of the bull put spread (like what we did in class for the zero-cost collar). Draw a
diagram showing the payoff and profit/loss from the “bull put spread” as a function of
Amazon stock price at the options’ maturity.

© Walid Busaba, Ivey Business School, 2023