Question

A stock is currently priced at $130. The following options, with expiration in 4 months, are available:

K	c	p
120	12.80	1.85
125	8.65	3.11
130	5.05	4.85
135	2.61	7.55
140	1.10	11

Consider a strangle creating using options with strike prices of 125 and 135. For what range of stock prices (in 4 months) does this investment earn a profit?

Answer 1

Table below shows the range of stock price where the investment earns profit

Stock Prices	Long call strike 135	Long Put	Long call price	Long Put price	Total Payoff	Total Profit
100	0	25	-2.61	-3.11	25	19.28
101	0	24	-2.61	-3.11	24	18.28
102	0	23	-2.61	-3.11	23	17.28
103	0	22	-2.61	-3.11	22	16.28
104	0	21	-2.61	-3.11	21	15.28
105	0	20	-2.61	-3.11	20	14.28
106	0	19	-2.61	-3.11	19	13.28
107	0	18	-2.61	-3.11	18	12.28
108	0	17	-2.61	-3.11	17	11.28
109	0	16	-2.61	-3.11	16	10.28
110	0	15	-2.61	-3.11	15	9.28
111	0	14	-2.61	-3.11	14	8.28
112	0	13	-2.61	-3.11	13	7.28
113	0	12	-2.61	-3.11	12	6.28
114	0	11	-2.61	-3.11	11	5.28
115	0	10	-2.61	-3.11	10	4.28
116	0	9	-2.61	-3.11	9	3.28
117	0	8	-2.61	-3.11	8	2.28
118	0	7	-2.61	-3.11	7	1.28
119	0	6	-2.61	-3.11	6	0.28
120	0	5	-2.61	-3.11	5	-0.72
121	0	4	-2.61	-3.11	4	-1.72
122	0	3	-2.61	-3.11	3	-2.72
123	0	2	-2.61	-3.11	2	-3.72
124	0	1	-2.61	-3.11	1	-4.72
125	0	0	-2.61	-3.11	0	-5.72
126	0	0	-2.61	-3.11	0	-5.72
127	0	0	-2.61	-3.11	0	-5.72
128	0	0	-2.61	-3.11	0	-5.72
129	0	0	-2.61	-3.11	0	-5.72
130	0	0	-2.61	-3.11	0	-5.72
131	0	0	-2.61	-3.11	0	-5.72
132	0	0	-2.61	-3.11	0	-5.72
133	0	0	-2.61	-3.11	0	-5.72
134	0	0	-2.61	-3.11	0	-5.72
135	0	0	-2.61	-3.11	0	-5.72
136	1	0	-2.61	-3.11	1	-4.72
137	2	0	-2.61	-3.11	2	-3.72
138	3	0	-2.61	-3.11	3	-2.72
139	4	0	-2.61	-3.11	4	-1.72
140	5	0	-2.61	-3.11	5	-0.72
141	6	0	-2.61	-3.11	6	0.28
142	7	0	-2.61	-3.11	7	1.28
143	8	0	-2.61	-3.11	8	2.28
144	9	0	-2.61	-3.11	9	3.28
145	10	0	-2.61	-3.11	10	4.28
146	11	0	-2.61	-3.11	11	5.28
147	12	0	-2.61	-3.11	12	6.28
148	13	0	-2.61	-3.11	13	7.28
149	14	0	-2.61	-3.11	14	8.28
150	15	0	-2.61	-3.11	15	9.28
151	16	0	-2.61	-3.11	16	10.28
152	17	0	-2.61	-3.11	17	11.28
153	18	0	-2.61	-3.11	18	12.28
154	19	0	-2.61	-3.11	19	13.28
155	20	0	-2.61	-3.11	20	14.28
156	21	0	-2.61	-3.11	21	15.28
157	22	0	-2.61	-3.11	22	16.28
158	23	0	-2.61	-3.11	23	17.28
159	24	0	-2.61	-3.11	24	18.28
160	25	0	-2.61	-3.11	25	19.28

It can be seen that above the stock price of 140 and below the stock price of 120, the investment can make a profit. (This is by considering we are in long strangle position and not in short strangle position)