Donna Donie, CFA, has a client who believes the common stock price of TRT Materials (currently $58 per share) could move substantially in either direction in reaction to an expected court decision involving the company. The client currently owns no TRT shares, but asks Donie for advice about implementing a strangle strategy to capitalize on the possible stock price movement. A strangle is a portfolio of a put and a call with different exercise prices but the same expiration date. Donie gathers the following TRT option price data:
Characteristic | Call Option | Put Option |
Price | $5 | $4 |
Strike Price | $60 | $55 |
Time to expiration | 90 days from now | 90 days from now |
a. Recommend whether Donie should choose a long strangle strategy or a short strangle strategy to achieve the client’s objective.
b. Calculate, at expiration for the appropriate strangle strategy in part (a), the
i. Maximum possible loss per share.
ii. Maximum possible gain per share.
iii. Break-even stock price(s).
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