Question

Please kindly answer the questions (little boxes) five for each question completely, and clearly. thank you

Strangles Strangles are very similar to straddles in many ways: they are composed of a combination of puts and calls, and for the long position, extreme moves in the price of the underlying are necessary for the position to be profitable, and profitability is not dependent upon direction (a sharp downward move can also be profitable). The major difference between the strangle and the straddle is that with the strangle you must use different strike prices for the puts & calls. A long strangle is created by purchasing the same number of calls and puts on the same underlying with the same expiration, but with different strike prices. The long strangle is useful in markets that are about to experience high volatility, as extreme movements in the underlying are necessary for the position to be profitable. The risk/reward aspects are similar to those of the long straddle in that it offers limited risk and unlimited return. A short strangle is created by selling the same number of calls and puts on the same underlying with the same expiration, but with different strike prices. The short strangle is used in markets that are about to experience low volatility. It is established by selling both an OTM put and an OTM call, with the current price of the underlying centered between the two strike prices. This gives the trader a price range within which his/her position is profitable. $4.00 Long Strangle $2.00 Composition: Long a call with a high strike and long a put with a low strike, both with the same expiration 88 15o 112 124 136 148 160 172 184 i 196 208 Max Profit: Unlimited to the upside, limited by the price of the stock to the downside ---- Long Call - Long Put Max Loss: Debit incurred to buy strangle -----::---::------------ Long Strangle $12.00) $(4.00) $16.00) $(8.00) $(10.00) $(12.00) $(14.00) BEP: There are 2 -- lower strike minus debit & upper strike plus debit

Answer 1

YZA Stock

1]

Cost of 90/210 strangle = cost of buying 210 call option + cost of buying 90 put option

cost of buying 210 call option = ask price = $3.75

cost of buying 90 put option = ask price = $2.44

Cost of 90/210 strangle =  $3.75 + $2.44 = $6.19

2]

Lower break even = strike price of put option - cost of straddle

Lower break even = $90 - $6.19 = $83.81

Upper break even = strike price of call option + cost of straddle

Upper break even = $210 + $6.19 = $216.19

3]

The put option will expire worthless.

Value of call option = stock price at expiry - strike price of call option = $225 - $210 = $15

Value of position = value of call option - cost of straddle

Value of position = $15 - $6.19 = $8.81

4]

The put option will expire worthless.

Value of call option = stock price at expiry - strike price of call option = $212 - $210 = $2

Value of position = value of call option - cost of straddle

Value of position = $2 - $6.19 = -$4.19

5]

The call option will expire worthless.

Value of put option = strike price of put option - stock price at expiry = $90 - $75 = $15

Value of position = value of put option - cost of straddle

Value of position = $15 - $6.19 = $8.81