Question

An investor buys a 6 months maturity strangle on XYZ stock at $32 call and $27 put, for $2 call and $3 put.

1. What is the long and short strangle payoff, if the stock price at expiration date increased to $42 per share?           
2. What are the long and short strangle payoffs, if the market price at expiration date decreased to $20 per share?
3. What are the long and short strangle payoffs, if the market price at expiration date remained $32 per share?
4. What are the breakeven points for XYZ stock strangle strategy?

Answer 1

A Long strangle is a strategy where investor buy a Call and A put at higher and lower prices respectively whereas a short Strangle is a strategy where investor sell the call and put at the respective prices.

Here the Strike price of Call = $32 and its price is $2

and the strike of Put is =$27 with price $3

when price is $42

Long Strangle: Here the put option will not be exercised but call option will be

Payoff = (42-32)-2-3 = 5 profit

Short Strangle: Here also the Call option will be exercised but this time we are the seller of the option.

Payoff = -(42-32) + 2 + 3 = -5 loss

When price is 20$

Long strangle Payoff : only put will be exercised = (27-20) - 2 -3 = 2 profit

Short strangle Payoff : only Put = -(27-20)-2-3 = -2loss

When price is 32$

Long and Short Strangle: this time neither put nor Call will be exercised

option seller will gain = 2+3 = 5

option buyer will loose = -5

Breakeven point is the point of no loss or profit.

in case of Strangle - if the price is 22 or 37 there will be no loss or profit to the buyer in other sense he has just acquired its prices of options.

thanks

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