Show graphically and discuss the LONG STRANGLE OPTION. Assume for a round lot the put option...

Show graphically and discuss the LONG STRANGLE OPTION. Assume for a round lot the put option price is $1.80, the call option price is $1.35, the call strike price is 42, the put strike price is 37 and at expiration this asset is trading at $50. What would you do and how much money would you make or lose on this position? Show a graph and your numerical calculations. (10 points)

Solutions

Expert Solution

To create a long strangle we buy a lower strike put option and buy a higher strike call option

Buy X1 = $37 strike put option for $1.80

Buy X2 = $42 strike call option for $1.35

St = $50

Put option profit = max(X1 - St, 0) - Put option price

Put option profit = max(37 - 50, 0) - 1.80

Put option profit = 0 - 1.80 = -$1.80

Call option profit = max(St - X2, 0) - Call option price

Call option profit = max(50 - 42, 0) - 1.35

Call option profit = 8 - 1.35= $6.65

Long strangle profit = Put option profit + Call option profit

Long strangle profit = -1.80 + 6.65

Long strangle profit = $4.85

Screenshot with formulas

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A long strangle is created by buying a slightly out of the money put and a...

A long strangle is created by buying a slightly out of the money put and a slightly out of the money call with the same expiration date. The market price of MSFT is $184.00. The June 5 $195.00 calls have a premium of $1.70 The June 5 $175.00 calls have a premium of $3.70 a) What is the most an investor can lose on this position? b) What does the price of MSFT need to be for the investor to...

A trader creates a long strangle with put options with a strike price of $160 per...

A trader creates a long strangle with put options with a strike price of $160 per share, and call options with a strike of $170 per share by trading a total of 30 option contracts (15 put contracts and 15 call contracts). Each contract is written on 100 shares of stock. The put option is worth $13 per share, and the call option is worth $11 per share. What is the value of the strangle at maturity as a function...

A trader creates a long strangle with put options with a strike price of $160 per...

A trader creates a long strangle with put options with a strike price of $160 per share, and call options with a strike of $170 per share by trading a total of 30 option contracts (15 put contracts and 15 call contracts). Each contract is written on 100 shares of stock. The put option is worth $13 per share, and the call option is worth $11 per share. A. What is the value of the strangle at maturity as a...

Assume that consumers in country suddenly decreased their expenditure. Show graphically the short run and long...

Assume that consumers in country suddenly decreased their expenditure. Show graphically the short run and long run impact of this decrease on the macroeconomic equilibrium point using AD and AS model (assume that the country's economy initially operates at the potential level of GDP and there is no government intervention). Briefly explain. On December 13, 2017, the US Central Bank Chairman, Prof. Jeanette Yellen, announced an increase in the interest rate. Use the money market model to show graphically how...

Assume the following for a stock and a call and a put option written on the...

Assume the following for a stock and a call and a put option written on the stock. EXERCISE PRICE = $20 CURRENT STOCK PRICE = $20 VARIANCE = .25 TIME TO EXPIRATION = 3 MONTHS RISK FREE RATE = 3% Use the Black Scholes procedure to determine the value of the call option and the value of a put.

Suppose you short a put option with a strike price of $20 and long another put...

Suppose you short a put option with a strike price of $20 and long another put option with a strike price of $18. Assume the premium for the first option is $1 and the premium for the second option is $0.5. Which of the following is correct? You wish the stock price stays above $20. If stock price is at $19.8, you have incurred a loss. You only have a loss if the stock price goes below $18. You only...

Assume that the stock price is $56, call option price is $9, the put option price...

Assume that the stock price is $56, call option price is $9, the put option price is $5, risk-free rate is 5%, the maturity of both options is 1 year , and the strike price of both options is 58. An investor can __the put option, ___the call option, ___the stock, and ______ to explore the arbitrage opportunity. A. sell, buy, short-sell, lend B. buy, sell, buy, borrow C. sell, buy, short-sell, borrow D. buy, sell, buy, lend

1a) Draw the payoff picture at expiration for a long position in a put option that...

1a) Draw the payoff picture at expiration for a long position in a put option that has a premium of $3.50 and a strike price of $35. Draw the payoff picture for a short position in the put option given in Problem 1a

1. Suppose that you are long in the cash market and hedge with a put option....

1. Suppose that you are long in the cash market and hedge with a put option. As the price of the commodity rises above the strike price what does the hedging position cost you? 2. An ethanol producer would purchase a put option to hedge against potential increases in the price of corn. True or False 3. What is the strike price of an option? The intrinsic value of the option. The price you paid to purchase the option. The...

Draw the payoff picture at expiration for a long position in a put option that has...

Draw the payoff picture at expiration for a long position in a put option that has a premium of $3.50 and a strike price of $60.

Subjects