Straddle Example• Current stock price = $100•Purchase at-the-money call (strike = 100) for $2 •Purchase at-the-money...

Straddle Example•

Current stock price = $100•Purchase at-the-money call (strike = 100) for $2

•Purchase at-the-money put (strike = 100) for $3

•What is the total value of your option portfolio for different stock prices(e.g. $120 or $85?)

Solutions

Expert Solution

Initial cost of the strategy = Premium paid for buying a call option and buying a put option

Given,Cost of Call @ 100 strike = 2 USD

Cost of Put @ 100 strike - 3 USD

Therefore, total cost is 5 USD.

The profit from the startegy will happen if the stock moves above 105 USD or moves below 95 USD.

Case 1 - When stock price @ 120 USD,

Pay off from the call option is Max (120-100, 0) , which is 20 USD

Pay off the Put options is Max (100-120,0), which is zero. The option is not exercised and remain worthless.

Total pay off from Call and Put is 20+0 = 20 USD

Net profit is computed by subtracting the initial cost of 5 USD from the total pay off = 20 - 5 = 15 USD.

Therefore total value of portfolio, when the stock price @ 120 usd is 15 USD.

Case 2 - When stock price @ 85 USD,

Pay off from the call option is Max (85 -100, 0) , which is 0 dollars. The option is not exercised and remain worthless.

Pay off the Put options is Max (100-85), which is 15 USD.

Total pay off from Call and Put is 15+0 = 15 USD

Net profit is computed by subtracting the initial cost of 5 USD from the total pay off = 15- 5 = 10USD.

Therefore total value of portfolio, when the stock price @ 85 usd is 10USD.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

2) The current price of a stock is $84. A one-month call option with a strike...

2) The current price of a stock is $84. A one-month call option with a strike price of $87 currently sells for $2.80. An investor who feels that the price of the stock will increase is trying to decide between two strategies that require the same upfront cost: Buying 100 shares or buying 3,000 call options (30 call option contracts). How high does the stock price have to rise for the option strategy to be more profitable?

The current price of a stock is $84. A one-month call option with a strike price...

The current price of a stock is $84. A one-month call option with a strike price of $87 currently sells for $2.80. An investor who feels that the price of the stock will increase is trying to decide between two strategies that require the same upfront cost: Buying 100 shares or buying 3,000 call options (30 call option contracts). How high does the stock price have to rise for the option strategy to be more profitable?

Current stock price is 27 while a call option is available with a strike price of...

Current stock price is 27 while a call option is available with a strike price of 20 and at a price of 3.77. A 1:2 Hedge is formed. If after a certain time, stock price declines to 15.5, Net Profit (Loss) of the trader is ________. In contrast, if stock price increases to 26, net profit (loss) will be ________. At price stock price ________ and _______, net payoff will be zero.

You purchase 18 call option contracts with a strike price of $100 and a premium of...

You purchase 18 call option contracts with a strike price of $100 and a premium of $2.85. Assume the stock price at expiration is $112.00. a. What is your dollar profit? (Do not round intermediate calculations.) b. What is your dollar profit if the stock price is $97.95? (A negative value should be indicated by a minus sign. Do not round intermediate calculations.)

The price of a call option with a strike of $100 is $10. The price of...

The price of a call option with a strike of $100 is $10. The price of a put option with a strike of $100 is $5. Interest rates are 0 and the current price of the underlying is $100. Can you make an arbitrage profit? If so how? Describe the trade and your pay offs in detail. Part 2: The price of a call option with a strike of $100 is $10. The price of a put option with a...

You establish a straddle on Walmart using September call and put options with a strike price...

You establish a straddle on Walmart using September call and put options with a strike price of $85. The call premium is $7.25 and the put premium is $8.00. a. What is the most you can lose on this position? (Input the amount as positive value. Round your answer to 2 decimal places.) b. What will be your profit or loss if Walmart is selling for $89 in September? (Input the amount as positive value. Round your answer to 2...

The current price of a stock is $40, and two-month European call options with a strike...

The current price of a stock is $40, and two-month European call options with a strike price of $43 currently sell for $5. An investor who feels that the price of the stock will increase is trying to decide between two strategies: buying 100 shares or buying 800 call options (8 contracts). Both strategies involve an investment of $4,000. a. Which strategy will earn more profits if the stock increases to $42? b. How high does the stock price have...

Suppose you have a call option on a stock with a strike price of $2 2....

Suppose you have a call option on a stock with a strike price of $2 2. A) Fill in the stock price and strike price in the table and calculate the exercise value ( B) Plot the Stock price on the x-axis and the Exercise value on the y-axis. Be sure to label both axes with titles and include a chart title. Now assume you have the following data for a call option: Current stock price Strike price Time to...

Consider a call option on a stock, the stock price is $23, the strike price is...

Consider a call option on a stock, the stock price is $23, the strike price is $20, the continuously risk-free interest rate is 9% per annum, the volatility is 39% per annum and the time to maturity is 0.5. (i) What is the price of the option? (6 points). (ii) What is the price of the option if it is a put? (6 points) (iii) What is the price of the call option if a dividend of $2 is expected...

Suppose you do a one-year straddle strategy using a Call and a Put. The strike price...

Suppose you do a one-year straddle strategy using a Call and a Put. The strike price is $100. The underlying is the stock of company ABC. Assume the prices the stock can take next year are either $80 or $150. Both states of nature can reveal with 50% probability. (a) What are the payoﬀ you receive in the two possible scenarios stated before? Explain what is the option you exercise in every case. (b) What is the expected payoﬀ if...

Subjects