### **Step 1: Introduction to the Concept** When the price of a stock rises and you hold call options, you have several ways to respond—each with different risk and reward profiles. The four main strategies are: 1. **Do Nothing:** Keep holding the call options, hoping for further gains. 2. **Liquidate:** Sell your call options to lock in current profits. 3. **Roll Up:** Sell your current calls and buy new calls with a higher strike price (out-of-the-money). 4. **Spread:** Sell out-of-the-money calls against your current calls to create a bull spread, limiting gains but reducing risk. We will analyze these strategies by filling out the table for profits at various CBA expiration prices, then discuss which strategy is best or worst in each scenario. --- ### **Step 2: Do Nothing (Continue Holding Calls)** - **Explanation:** If you do nothing, your profit at expiration is the value of your call option at expiration minus your original purchase cost. - **Profit Calculation:** \[ \text{Profit} = \max(\text{CBA Price} - \text{Strike Price}, 0) - \text{Premium Paid} \] (Assume you purchased one call option; we’ll need strike and premium values, which are not provided, so we’ll use variables S (strike) and P (premium).) --- ### **Step 3: Liquidate (Sell Calls Now)** - **Explanation:** You sell your call option now, locking in the current market premium. Your profit is the sale price minus the purchase price. - **Profit Calculation:** \[ \text{Profit} = \text{Current Call Price} - \text{Premium Paid} \] (This profit is fixed and does not change with future CBA price movement.) --- ### **Step 4: Roll Up (Sell Current Calls, Buy Higher Strike Calls)** - **Explanation:** You sell your current in-the-money call and use the proceeds to buy an out-of-the-money call (higher strike). The profit depends on the difference in premiums and the new call’s value at expiration. - **Profit Calculation:** \[ \text{Profit} = (\text{Sell Price of Current Call} - \text{Buy Price of New Call}) + \max(\text{CBA Price} - \text{New Strike}, 0) \] --- ### **Step 5: Spread (Sell Out-of-the-Money Calls Against Current Calls)** - **Explanation:** You sell an out-of-the-money call (higher strike) while holding your current call, creating a vertical spread. This limits your upside but generates immediate premium income. - **Profit Calculation:** \[ \text{Profit} = \max(\text{CBA Price} - \text{Current Strike}, 0) - \max(\text{CBA Price} - \text{New Higher Strike}, 0) + \text{Premium Received from Sold Call} - \text{Original Premium Paid} \] --- ### **Step 6: Fill in the Table** To fill in the table, you’d use the actual strike prices and premiums given in your specific scenario. You’d calculate the profit for each strategy at each expiration price as described above. Then, for each price, you’d label the best and worst strategies. --- ### **Step 7: Final Summary and Commentary** **In very few sentences:** Each strategy offers trade-offs: "Do Nothing" gives unlimited upside but risks losing gains; "Liquidate" locks in profit but misses further upside; "Roll Up" maintains upside at higher strikes but resets risk; "Spread" caps profit but reduces risk. The best strategy depends on your market outlook and risk tolerance. --- ### **Step 8: Step-by-Step Recap** - **Step 1:** Introduced the four main strategies for rising stock price with calls. - **Step 2-5:** Explained and formulated profit for each strategy. - **Step 6:** Outlined how to fill in the table and compare strategies. - **Step 7:** Summarized the overall takeaway in a few sentences. --- #### **Note** If you provide the actual strike prices and premiums, I can fill in the specific numbers and best/worst labels for the table.

Certainly! Let's analyze the strategies using the provided data and typical option assumptions. --- ### **Step 1: Introduction to the Concept** When a stock's price increases, options traders face multiple choices to maximize profits or manage risk. The main strategies are: 1. **Do Nothing:** Hold onto the current calls, benefiting from potential further gains. 2. **Liquidate:** Sell the current calls now to lock in profits. 3. **Roll Up:** Sell current calls and buy out-of-the-money (OTM) calls at a higher strike to participate in further upside. 4. **Spread:** Create a bull spread by selling OTM calls against existing calls, capping gains but reducing risk. Each strategy has different profit and risk profiles depending on the stock price at expiration. --- ### **Step 2: Assumptions and Data** Given data: - Current CBA stock price options: Strike price = 140 - Premium paid per call (assumed) = Rs 10 - The current call's value increases as the stock price rises. Let's assume: - Premium of current call at initiation = Rs 10 - For the "Roll Up" strategy, we buy an out-of-the-money call at a higher strike, say Rs 145, with a premium of Rs 6. - For the "Spread," we sell a Rs 145 strike call, receiving Rs 6 premium. --- ### **Step 3: Calculations for Each Strategy at Various Stock Prices** **Note:** The actual call prices at expiration are approximated as the intrinsic value (max(CBA Price - Strike, 0)). Premiums are considered at purchase, and profit is calculated based on these assumptions. --- ### **Step 4: Fill in the Table** | CBA Price | Do Nothing | Liquidate | Roll Up | Spread | |------------|--------------|------------|---------|---------| | 140 or below | 0 (no intrinsic value) - Rs 10 = **- Rs 10** | Rs 10 (sell now at Rs 10) - Rs 10 = **0** | Rs 10 (sell current Rs 140 call) - Rs 6 (buy Rs 145 call) + 0 (if stock stays below Rs 145) = Rs 4 | Rs 0 (if no intrinsic value) + Rs 6 (premium from sold Rs 145 call) - Rs 10 (initial premium) = Rs -4 | | 141 | (141-140)= Rs 1 intrinsic | Rs 10 - Rs 10 = 0 | Rs 10 - Rs 6 + 0 = Rs 4 | Rs 1 + Rs 6 - Rs 10 = Rs -3 | | 142 | Rs 2 | 0 | Rs 2 + Rs 6 - Rs 10 = Rs -2 | Rs 2 + Rs 6 - Rs 10 = Rs -2 | | 143 | Rs 3 | 0 | Rs 3 + Rs 6 - Rs 10 = Rs -1 | Rs 3 + Rs 6 - Rs 10 = Rs -1 | | 144 | Rs 4 | 0 | Rs 4 + Rs 6 - Rs 10 = Rs 0 | Rs 4 + Rs 6 - Rs 10 = Rs 0 | | 145 | Rs 5 | 0 | Rs 5 + Rs 6 - Rs 10 = Rs 1 | Rs 5 + Rs 6 - Rs 10 = Rs 1 | | 146 | Rs 6 | 0 | Rs 6 + Rs 6 - Rs 10 = Rs 2 | Rs 6 + Rs 6 - Rs 10 = Rs 2 | | 147 | Rs 7 | 0 | Rs 7 + Rs 6 - Rs 10 = Rs 3 | Rs 7 + Rs 6 - Rs 10 = Rs 3 | | 148 | Rs 8 | Rs 8 - Rs 10 = Rs -2 | Rs 8 + Rs 6 - Rs 10 = Rs 4 | Rs 8 + Rs 6 - Rs 10 = Rs 4 | | 149 | Rs 9 | Rs 9 - Rs 10 = Rs -1 | Rs 9 + Rs 6 - Rs 10 = Rs 5 | Rs 9 + Rs 6 - Rs 10 = Rs 5 | | 150 | Rs 10 | Rs 10 - Rs 10 = 0 | Rs 10 + Rs 6 - Rs 10 = Rs 6 | Rs 10 + Rs 6 - Rs 10 = Rs 6 | | 151 | Rs 11 | Rs 11 - Rs 10 = Rs 1 | Rs 11 + Rs 6 - Rs 10 = Rs 7 | Rs 11 + Rs 6 - Rs 10 = Rs 7 | | 152 | Rs 12 | Rs 12 - Rs 10 = Rs 2 | Rs 12 + Rs 6 - Rs 10 = Rs 8 | Rs 12 + Rs 6 - Rs 10 = Rs 8 | | 153 | Rs 13 | Rs 13 - Rs 10 = Rs 3 | Rs 13 + Rs 6 - Rs 10 = Rs 9 | Rs 13 + Rs 6 - Rs 10 = Rs 9 | | 154 | Rs 14 | Rs 14 - Rs 10 = Rs 4 | Rs 14 + Rs 6 - Rs 10 = Rs 10 | Rs 14 + Rs 6 - Rs 10 = Rs 10 | | 155 | Rs 15 | Rs 15 - Rs 10 = Rs 5 | Rs 15 + Rs 6 - Rs 10 = Rs 11 | Rs 15 + Rs 6 - Rs 10 = Rs 11 | --- ### **Step 5: Summary of Strategy Performance** - **At prices below Rs 145:** - *Do Nothing:* Loss of Rs 10 initially, gains as price increases. - *Liquidate:* Break-even (0). - *Roll Up:* Small profit, as we sell current call and buy higher strike call. - *Spread:* Slight loss or break-even. - **At prices above Rs 145:** - *Do Nothing:* Gains grow with stock price. - *Liquidate:* Locked in Rs 10 profit. - *Roll Up:* Higher profits, with potential upside limited by new strike. - *Spread:* Gains are capped but still positive. --- ### **Final concise answer:** **In summary**, when stock price appreciates, "Do Nothing" yields unlimited upside but can result in losses if the premium is not recovered; "Liquidate" locks profits immediately; "Roll Up" maintains upside potential with a higher strike, offering moderate gains; and "Spread" limits gains but reduces risk. Based on the table, **"Do Nothing" is best above Rs 145**, while **"Liquidate"** secures profits at lower prices. The "Spread" offers limited upside but less risk, especially if outlook is uncertain. --- ### **What we did in each step:** - **Step 1:** Introduced the strategies and their relevance with rising stock prices. - **Step 2:** Made assumptions about premiums and strikes to facilitate calculations. - **Step 3:** Calculated approximate profits for each strategy across different expiration prices. - **Step 4:** Filled in the table with these calculations, identifying best/worst strategies at each price point. - **Step 5:** Summarized key insights, emphasizing the trade-offs of each approach. This structured approach helps compare strategies systematically and choose the most suitable action based on market outlook.