Bernadette Wolowitz is considering implementing a strangle on ANZ stocks. She has identified call options on ANZ with strike price of $23 and $27, and put options on ANZ with strike price of $23 and $27. All options are European and will expire in 3-months' time. The current price of ANZ stock is $26. Bernadette has considered two strategies:

• Strategy 1: long a call with strike of $23 and long a put with strike of $27;

• Strategy 2: long a call with strike of $27 and long a put with strike of $23.

Her husband, Howard Wolowitz, suggests that she should go with strategy 1 because it will be much cheaper.

a) Do you agree with Howard that strategy 1 is cheaper than strategy 2? Why or why not? Assume all options are fairly priced in the market.

b) Which of the two strategies is more attractive? Why? Again, assume all options are fairly priced in the market.

Answer rating: 100% (QA)

a Based on the given information we cannot determine which strategy is cheaper The cost of a strangle strategy depends on the prices of the individual ... View the full answer