The Galaxy Dividend Income Growth Fund's Option Investment Strategies

This case is designed to provide an elementary introduction to options and option pricing for beginning finance students. Analysis of the case requires students to compare the prices of put and call options with various exercise prices and maturity dates on two equities (JPMorgan Chase and Facebook) that had identical closing stock prices on January 14, 2014 but very different volatilities. These common features and differences enable students to do a series of static comparisons that reveal the impact of a change in one determinant of an option's price while holding other factors constant. The business setting involves a mutual fund board considering the initiation of an option trading strategy to enhance the risk-adjusted performance of the fund and, through covered call writing, to increase earned income that can be used to support cash dividend distributions. Although the administrative situation is fictional, the data contained in the case are real. The case is best positioned at the beginning of a course module on derivatives and risk management.