Question

Consider a call and put on the same underlying asset. The call has an exercise price of $100 and costs $20. The put has an exercise price of $90 and costs $12. 3.1 Graph a short position in a strangle based on these two options. [3] 3.2 What is the worst outcome from selling the strangle? [1] 3.3 At what price of the asset does the strangle have a zero profit?

Answer 1

		Short Position in Strangle:
	1	Selling Call(Short)
		Excerice Price =$100
		Cost=$20
		Assume, Price at Expiration =S
		Payoff:
		If S< or=$100,Payoff=$0
		If S>100, Payoff =(100-S)
	2	Selling Put(Short)
		Excerice Price =$90
		Cost=$12
		Assume, Price at Expiration =S
		Payoff:
		If S> or=$90,Payoff=$0
		If S<90, Payoff =(S-90)
		Total Amount of Premium received=20+12=	$32
		S	C	P	C+P+32
		Price at Expiration	Payoff Short Call	Payoff Short Put	Net Profit/(Loss)
		$40	$0	($50)	($18)
		$45	$0	($45)	($13)
		$50	$0	($40)	($8)
		$55	$0	($35)	($3)
		$58	$0	($32)	$0
		$60	$0	($30)	$2
		$65	$0	($25)	$7
		$70	$0	($20)	$12
		$75	$0	($15)	$17
		$80	$0	($10)	$22
		$85	$0	($5)	$27
		$90	$0	$0	$32
		$95	$0	$0	$32
		$100	$0	$0	$32
		$105	($5)	$0	$27
		$110	($10)	$0	$22
		$115	($15)	$0	$17
		$120	($20)	$0	$12
		$125	($25)	$0	$7
		$130	($30)	$0	$2
		$132	($32)	$0	$0
		$135	($35)	$0	($3)
		$140	($40)	$0	($8)
		$145	($45)	$0	($13)
		$150	($50)	$0	($18)
	3.2	Worst Outcome:
		The losses can be infinite if there is high volatility
	3.3	Zero Profit
		At Expiration Price of $132 at the upper side
		At Expiration Price of $58 at the Lower level