Question

Call options on a stock TKM are available with strike prices of $13, $15, $17.5, $18.5 and $20 and expiration dates in three months. Their prices are $5.5, $4, $2, $1.5 and $0.5 respectively. Put options on the same stock are available with strike prices of $24, $23.5, $22.5, $21 and $19 and expiration dates in three months. Their prices are $5, $4, $2, $1.5 and $0.5 respectively. TKM is currently trading at $19.40 and assuming the company is in the education industry with a turnover of $120 million per annum and 80 full time employees and the company is in the market for thirty years focusing on higher learning education and adult/executive learning programs. TKM has three main offices in the U.S. and is thinking to explore international business in the future to grow its portfolio.

Answer 1

As per given details, TKM is in education sector with turnover of $120 per annum and good number of strengh is working in company. We assume that company has good potential of growth in next 3 month, so we can develop Long Straddle strategy to maximise profits and minimise risks:

Payoff at various price price at expiry along with graph is as follows:

Particular	Value
Underlying	TKM
Spot Price	19.4
ATM , CE , Buy	20
ATM, PE, Buy	19
CE Premium	0.5
PE Premium	0.5
Net debit	1

Details
Spread		1
Lower Breakeven	18
Upper Breakeven	21
Max Loss		1
Max Loss level		19
Max Profit		Unlimited

Market Expiry	CE_IV	PP	CE Payoff	PE_IV	PP	PE_Payoff	Strategy Payoff
15	0	-0.5	-0.5	4	-0.5	3.5	3
16	0	-0.5	-0.5	3	-0.5	2.5	2
17	0	-0.5	-0.5	2	-0.5	1.5	1
18	0	-0.5	-0.5	1	-0.5	0.5	0
19	0	-0.5	-0.5	0	-0.5	-0.5	-1
20	0	-0.5	-0.5	0	-0.5	-0.5	-1
21	1	-0.5	0.5	0	-0.5	-0.5	0
22	2	-0.5	1.5	0	-0.5	-0.5	1
23	3	-0.5	2.5	0	-0.5	-0.5	2
24	4	-0.5	3.5	0	-0.5	-0.5	3
25	5	-0.5	4.5	0	-0.5	-0.5	4
26	6	-0.5	5.5	0	-0.5	-0.5	5
27	7	-0.5	6.5	0	-0.5	-0.5	6
28	8	-0.5	7.5	0	-0.5	-0.5	7
29	9	-0.5	8.5	0	-0.5	-0.5	8
30	10	-0.5	9.5	0	-0.5	-0.5	9
31	11	-0.5	10.5	0	-0.5	-0.5	10
32	12	-0.5	11.5	0	-0.5	-0.5	11
33	13	-0.5	12.5	0	-0.5	-0.5	12
34	14	-0.5	13.5	0	-0.5	-0.5	13
35	15	-0.5	14.5	0	-0.5	-0.5	14
36	16	-0.5	15.5	0	-0.5	-0.5	15
37	17	-0.5	16.5	0	-0.5	-0.5	16