3. Construct profit and payoff diagrams for the following: a) Long a 105 strike straddle. b)...
3. Construct profit and payoff diagrams for the following:
a) Long a 105 strike straddle.
b) Short a 95 strike straddle.
c) Combine a) and b) in a single portfolio.
Homework Answers
Long Straddle
It is an Option trading strategy in which, investor Buy(Long) a put and a call at same strike price and same maturity. If the price goes up exercise the call option and if price goes down exercise the put option.
Short Straddle
It is an Option trading strategy in which, investor Sell(Short) a put and a call at same strike price and same maturity.
a) Long a 105 strike straddle
As the the premium of option not provided in question, it assumed that both option has equal premium of $ 2.5 to calculate profit and loss. hence, cost of strategy would be $ 5.
Please refer below for graph.
Formula Reference-
a) Short a 95 strike straddle
As the the premium of option not provided in question, it assumed that both option has equal premium of $ 2.5 to calculate profit and loss. hence, writing proceed would be $ 5.
Formula reference -
c. Portfolio has both long and short straddle
As assumed, cost of long straddle and proceed of short straddle is same. that's why payoff and profit and loss would be same.
formula reference -
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