Question

Given the following:

Call Option: strike price = $100, costs $4

Put Option: strike price = $90, costs $6

How can a strangle be created from these 2 options? What are the profit patterns from this? Show using excel.

Answer 1

A strangle is a strategy in which an investor buys a European put and a European call with the same expiration date and different strike prices.

The strangle buyer investor is betting that there will be a large price move.

The investor buys a Put of strike price $90(X1) costing $6 and sells a call of strike price $100(X2) for $4.

Stock price at maturity time T	Payoff from call	Payoff from put	Total payoff
ST ≤ 90	0	90-ST	90-ST
90 < ST < 100	0	0	0
ST ≥ 100	ST-100	0	ST-100

Stock price at maturity time T	Payoff from call +call premium paid	Payoff from put +put premium paid	Total payoff
50	-4	34	30
51	-4	33	29
52	-4	32	28
53	-4	31	27
54	-4	30	26
55	-4	29	25
56	-4	28	24
57	-4	27	23
58	-4	26	22
59	-4	25	21
60	-4	24	20
61	-4	23	19
62	-4	22	18
63	-4	21	17
64	-4	20	16
65	-4	19	15
66	-4	18	14
67	-4	17	13
68	-4	16	12
69	-4	15	11
70	-4	14	10
71	-4	13	9
72	-4	12	8
73	-4	11	7
74	-4	10	6
75	-4	9	5
76	-4	8	4
77	-4	7	3
78	-4	6	2
79	-4	5	1
80	-4	4	0
81	-4	3	-1
82	-4	2	-2
83	-4	1	-3
84	-4	0	-4
85	-4	-1	-5
86	-4	-2	-6
87	-4	-3	-7
88	-4	-4	-8
89	-4	-5	-9
90	-4	-6	-10
91	-4	-6	-10
92	-4	-6	-10
93	-4	-6	-10
94	-4	-6	-10
95	-4	-6	-10
96	-4	-6	-10
97	-4	-6	-10
98	-4	-6	-10
99	-4	-6	-10
100	-4	-6	-10
101	-3	-6	-9
102	-2	-6	-8
103	-1	-6	-7
104	0	-6	-6
105	1	-6	-5
106	2	-6	-4
107	3	-6	-3
108	4	-6	-2
109	5	-6	-1
110	6	-6	0
111	7	-6	1
112	8	-6	2
113	9	-6	3
114	10	-6	4
115	11	-6	5
116	12	-6	6
117	13	-6	7
118	14	-6	8
119	15	-6	9
120	16	-6	10
121	17	-6	11
122	18	-6	12
123	19	-6	13
124	20	-6	14
125	21	-6	15
126	22	-6	16
127	23	-6	17
128	24	-6	18
129	25	-6	19
130	26	-6	20
131	27	-6	21
132	28	-6	22
133	29	-6	23
134	30	-6	24
135	31	-6	25
136	32	-6	26
137	33	-6	27
138	34	-6	28
139	35	-6	29
140	36	-6	30
141	37	-6	31
142	38	-6	32
143	39	-6	33
144	40	-6	34
145	41	-6	35
146	42	-6	36
147	43	-6	37
148	44	-6	38
149	45	-6	39
150	46	-6	40