Suppose an investor is considering a multi option strategy on a stock with a current price of $100. The following strategy is called a strangle. The investor purchases a call option with a strike price of $110 for a premium of $5 and purchases a put option with a strike price of $90 for a premium of $3. a) Draw a payout diagram for the strangle option strategy at expiration. b) Determine the breakeven points for the strangle option strategy. c) Suppose the stock price at expiration is $120. What is the profit for the strangle option strategy? d) Suppose the stock price at expiration is $85. What is the profit for the strangle option strategy? e) What is the investor speculating on with her option strategy?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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parts a, b, c
Suppose an investor is considering a multi option strategy on a stock with a current
price of $100. The following strategy is called a strangle. The investor purchases a call option
with a strike price of $110 for a premium of $5 and purchases a put option with a strike price
of $90 for a premium of $3.
a) Draw a payout diagram for the strangle option strategy at expiration.
b) Determine the breakeven points for the strangle option strategy.
c) Suppose the stock price at expiration is $120. What is the profit for the strangle option
strategy?
d) Suppose the stock price at expiration is $85. What is the profit for the strangle option
strategy?
e) What is the investor speculating on with her option strategy?

 
 
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