In: Finance
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 you paid $15 for the put
and $25 for the call?