Question

Using a Straddle Xerox Holdings Corp. (XRX) is pursuing a hostile takeover of HP Inc. (HPQ) and the price of HPQ shares have risen to reflect that possibility. However, the shareholders of HPQ are attempting to block the takeover bid and may be successful in doing so. If the takeover is unsuccessful, the price of HPQ shares will fall suddenly. Assuming that an investor could purchase a 3-month HPQ 18 call for a $1 premium and a 3-month HPQ 18 put for $0.50, what would be the price range outside of which the investor would realize a gain? The break-even price for a gain in value: The break-even price for a loss in value: The price range outside of which the investor would realize a gain:

Answer 1

IF ANY QUERY, FEEL FREE TO ASK IN COMMENTS Solution Total Premium = Premium on Call 1 1.5 + Premium on Put + 0.5 1 The Break even price for a gain in value: Upper Range Strike Price 18 19.50 + + Total Premium 1.5 2 The Break even price for a loss in value: Lower Range Strike Price 18 16.50 Total Premium 1.5 Hence, When Stock is in range of 16.50 to 19.50, Payoff is less than or equal to Total premium paid and 3 there is no Profit. When Stock Price Breach this range the Payoff become greater than Total premium paid, and this strategy turns profitable.