In Jan 2018, company ABC's stock price is traded at $150. The following table concerns information of the March, April, and May maturity option contracts on ABC's stock. The contract size of each option contract is 1000 shares.

 

(a) Describe how the trading strategy is constructed. Which call and/or put is (are) used to construct the trading strategy?

(b) What is the net payoff function for the trading strategy?

(c) Draw the profit and loss diagram of the trading strategy. Show the breakeven point(s), the strike price(s), and the maximal profit or loss of the trading strategy.

(d) What is your expectation of ABC's stock when you construct the trading strategy?

Transcribed Image Text:

Strike 145 150 155 March 2 4 1.25 Calls April 5 8.75 6.25 May 5 11 8.5 For the following option trading strategy on ABC's stock: Long strangle by using the May maturity options. March 0.5 0.75 3 Puts. April 3 5.25 7.5 May 3 6.75 9.25 Strike 145 150 155 March 2 4 1.25 Calls April 5 8.75 6.25 May 5 11 8.5 For the following option trading strategy on ABC's stock: Long strangle by using the May maturity options. March 0.5 0.75 3 Puts. April 3 5.25 7.5 May 3 6.75 9.25

Answer rating: 100% (QA)

a A long strangle is a strategy that involves buying a call option and a put option with the same expiration date but different strike prices The call ... View the full answer