Question

Straddle: Long $80 Call at $6, Long $80 Put at $4 Top Strangle: Short $75 Put...

  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 (VT and ΠT) for each relevant range of the underlying stock price (ST)
  3. The range over which the strategy is profitable

Homework Answers

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

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