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Two call options and two put options on a stock have the same expiration date and...

Two call options and two put options on a stock have the same expiration date and two strike prices of $187.5 (K1) and $262.5 (K2). The market prices of the call options are $90.5 (c1) and $13.88 (c2), and the market prices of the put options are $2.1 (p1) and $77.5 (p2), respectively.

(a) Explain how a long strangle can be created.

(b) Construct a profit (loss) table for the long strangle strategy at expiration of the options.

(c) Draw the profit (loss) graph for the long strangle strategy at expiration of the options.

(d) For what range of stock prices would the strangle lead to a loss? What is the maximum loss?

(e) For what range of stock prices would the strangle lead to a profit?

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