Question

1. A trader buys a call option with a strike price of €45 and a put option with a strike price of €40. Both options have the same maturity. The call costs €3 and the put costs €4. Draw a diagram showing the variation of the trader’s profit with the asset price. Explain the purpose of this strategy

Answer #1

Position of Trader:

Long call option with strike price of €45 bought at €3

Long put option with strike price of €40 bought at €4

Total Premium paid = $7

The above strategy is know as **long
strangle.**

Spot price at Expiry | Payoff from call with X = 45 | Payoff from Put with X = 40 | Total Premium on call + Put | Payoff from strategy |

10 | 0 | 30 | -7 | 23 |

15 | 0 | 25 | -7 | 18 |

20 | 0 | 20 | -7 | 13 |

25 | 0 | 15 | -7 | 8 |

30 | 0 | 10 | -7 | 3 |

35 | 0 | 5 | -7 | -2 |

40 | 0 | 0 | -7 | -7 |

45 | 0 | 0 | -7 | -7 |

50 | 5 | 0 | -7 | -2 |

55 | 10 | 0 | -7 | 3 |

60 | 15 | 0 | -7 | 8 |

65 | 20 | 0 | -7 | 13 |

70 | 25 | 0 | -7 | 18 |

75 | 30 | 0 | -7 | 23 |

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