A call with a strike price of $60 costs $6. A put with the same strike...

A call with a strike price of $60 costs $6. A put with the same strike price and expiration date costs $4. For each of the intervals defined by the strike price, show the profit functions associated with forming a straddle (long position), and its graphical representation. For what range of stock prices would the straddle lead to a loss?

Solutions

Expert Solution

Long straddle

Long straddle premium = Call price + Put price

Long straddle premium = 6 + 4 = $10

Long call profit = max(St - X, 0) - call price

Long put profit = max(X - St, 0) - put price

Long straddle profit = long call profit + put call profit

The range of stock prices for which the long straddle would lead to a loss = Strike price - straddle premium and Strike price + straddle premium

Lower bound = 60 - 10 = $50

Upper bound = 60 + 10 = $70

Loss range = 50 to 70

Screenshot with formulas

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A call with a strike price of $60 costs $9. A put with the same strike...

A call with a strike price of $60 costs $9. A put with the same strike price and expiration date costs $3. Construct a table that shows the profit from a straddle. For what range of stock prices would the straddle lead to a loss?

Given the following: Call Option: Strike Price = $60, expiration costs $6 Put Option: Strike Price...

Given the following: Call Option: Strike Price = $60, expiration costs $6 Put Option: Strike Price = $60, expiration costs $4 In excel, show the profit from a straddle for this. What range of stock prices would lead to a loss for this? Including a graph would be helpful.

A call option on a stock with a strike price of $60 costs $8. A put...

A call option on a stock with a strike price of $60 costs $8. A put option on the same stock with the same strike price costs $6. They both expire in 1 year. (a) How can these two options be used to create a straddle? (b) What is the initial investment? (c) Construct a table that shows the payoffs and profits for the straddle when the stock price in 3 months is $50, and $72, respectively. The table should...

A call with a strike price of $44 costs $4. A put with the same expiration...

A call with a strike price of $44 costs $4. A put with the same expiration date and a strike price of $40 costs $3. Calculate the profit/loss the investor makes from a short strangle at expiration date stock prices of (i) $38, (ii) $42, and (iii) $46. For what range of expiration date stock prices will the investor make a profit?

You buy one call and one put with a strike price of $60 for both. The call...

You buy one call and one put with a strike price of $60 for both. The call premium is $5 and the put premium is $6. What is the maximum loss from this strategy? [Using positive number for profit, and negative number for loss]

A put and a call option have the same maturity and strike price. If they also...

A put and a call option have the same maturity and strike price. If they also have the same price, which one is in the money? Mathematically show how you reached your conclusion.

Given the following: Call Option: strike price = $100, costs $4 Put Option: strike price =...

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.

A call option with a strike price of $50 costs $2. A put option with a...

A call option with a strike price of $50 costs $2. A put option with a strike price of $45 costs $3. Explain how a strangle can be created from these two options. Construct a table that shows the payoff and profits of the strangle.

Is a put option on the ¥ with a strike price in €/¥ also a call...

Is a put option on the ¥ with a strike price in €/¥ also a call option on the € with a strike price in ¥/€? Explain.

Utilise the following information. Call option price $5 with strike price $60, put option price $4...

Utilise the following information. Call option price $5 with strike price $60, put option price $4 with strike price $55. They both expire 90 days from now and are written on the same stock. A client believes the stock price could move substantially in either direction in reaction to an expected court decision involving the company. The client currently owns no stocks. 1. Draw the profit and loss graph of long strangle 2. Draw the profit and loss graph of...

Subjects