Question

1. Straddle: Long $80 Call at $6, Long $80 Put at $4
2. Top Strangle: Short $75 Put for $9, Short $85 Call for $11

For each of the 2 option strategies below please:

1. Calculate the initial cash flow (CF₀)
2. Produce a table showing the Value and Profit at expiration (V_T and Π_T) for each relevant range of the underlying stock price (S_T)
3. The range over which the strategy is profitable

Answer 1

Initial cashflow for straddle is outflow of $6+$4=$10. Initial cashflow for Top strangle is inflow of $9+$11=$20.

For Straddle,

	<70	70-80	80	80-90	>90
Value	80-x	80-x	0	x-80	x-80
Profit	70-x	70-x	-10	x-90	x-90

For Top Strangle,

	0	0-55	55-75	75-85	85-105	>105
Value	-75	x-75	x-75	0	85-x	85-x
Profit	-55	x-55	x-55	20	105-x	105-x

Straddle is profitable if the underlying asset closes below $70 or above $90.

Top Strangle is profitable if the underlying asset closes between $55 and $105