Question

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)

Answer 1

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