Individual Assignment
Submit your assignment electronically via the Turnitin Assignment tool by Wednesday 3rd November. You will need to upload a Word version of your assignment to Turnitin.
Statement of Acknowledgement of Original Work by submitting your assignment you declare that all material in this assessment is your own work. You have also read. Please be aware of policy and guidelines regarding plagiarism
While you are encouraged to make use of the Eikon access available to you for your individual research, it is a requirement to use only the data provided in the assignment data file for this assignment.
Students with student id starting with odd number may use “BXB” or “MQG” while those with EVEN number may use “RIO” or “WES” from the data file in so far as stock/option selection is concerned.
Much attention has been given to meme stocks of late. While the phenomenon is not entirely new, individual investors on social media platforms the likes of reddit has sparked a resurgence with more meme stocks created. Yet, much of the volatility in the equities market has been attributed to increased interest in trading out of the money options. Options, as opposed to stocks, often present a cheaper and efficient way to get into the “action”.
The put call ratio of a stock option can offer insight into speculators’ interest in the stock, thus providing valuable cues into market sentiments and potential volatile price movements. Opportunities can be had with the myriad of option strategies available to take advantage of the market outlook.
In this assignment, you would analyse the put call ratio of a stock to determine the market outlook and potential price swings (Part A). Armed with this information, determine an appropriate option strategy to capitalise on the opportunity presented (Part B). Given the same outlook in Part A, consider how you may instead invest in the relevant stock and hedge your stock position using index futures (Part C). Compare your option strategy with the alternative of investing in the stock and hedging it with index futures (Part D).
Part A
Use the open interest or trading volume data provided for the period 1st January 2021 to 15th August 2021 to investigate the market outlook. You are required to, at a minimum:
Plot the put-call ratio graph for the period 1st January 2021 to 15th August 2021. Explain your choice of open interest or volume.
Analyze the put-call ratio graph vis-a-vis the market outlook. Explain your findings and how that lead to your conclusion of whether the market is likely to be bullish, bearish or neutral.
Part B
Based on your analysis in Part A, execute an option strategy for the period 16th August to 30th August 2021 to capitalise on the market outlook. You are required to, at a minimum:
Determine an option strategy appropriate to your analyses in Part A. Explain your choice of the strategy and its execution. Your strategy may comprise only options or incorporate both options and stock. Assume a capital of $1,000,000.
Tabulate and evaluate the performance of the strategy in terms of risk and return, and potential improvement.
Part C
Assume $1,000,000 fully invested in the relevant stock on the 16th of August. Based on the market expectation determined in part A, implement a futures hedging strategy for the period 16th August to 30th August 2021. You are required to, at a minimum:
Implement the futures hedging strategy. Explain the strategy and its execution, and how that is appropriate to your analyses in Part A.
Tabulate and evaluate the performance of the strategy in terms of risk and return, and potential improvement.
Part D
Compare the returns and risks from your two strategies in Parts B and C. Is one strategy necessarily superior than the other given the market outlook you identified in part A?
Report writing and presentation
Your report must document a complete discussion of the process outlined above, including full details of transactions executed. Transaction costs must bear evidence that it is a realistic figure. Good structure, presentation and concise writing skills are likewise important. Your report length must have a minimum word count of 2,500 words (size 12 font, 1.5 spacing), including all discussion, graphs, tables and references.
