3. While LMN is trading for $20 a share, Sally purchases an LMN 21 Call and simu
ID: 2733638 • Letter: 3
Question
3. While LMN is trading for $20 a share, Sally purchases an LMN 21 Call and simultaneously purchases an LMN 19 Put. The 21 call has a cost of $1.10, and the 19 put has a cost of $0.90. She does not own the stock.
a. Is this a straddle, or a strangle? Explain. What advantage does Sally’s choice have over the other choice?
b. What is the cost of creating this position?
c. What prices of LMN stock will result in a profit for Sally? Show work.
4. Harry has purchased an S&P 500 index option call with a strike price of 1600. Sally has written the same index option. Upon expiration of the option, the S&P 500 index is at 1649.
a. What does each person pay, receive, or have to do at this point?
Explanation / Answer
3
a. Strangle
Straddles and strangles are both options strategies that allow the investor to gain on significant moves either up or down in a stock's price. Both strategies consist of buying an equal number of call and put options with the same expiration date; the only difference is that the strangle has two different strike prices, while the straddle has one common strike price.
b.
c.
Price should be either More than (21+2)= 23 or less than (19-2)=17
4.
Sally will receive = Premium amount received for writting call - (1649-1600)
Harry will receive = (1649-1600) - Premium amount paid to Sally
Cost of Call 1.1 Cost of Put 0.9 Total cost incurred for the position 2Related Questions
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