Question
After a detailed analysis on the risks and returns of the stock market and Stock XYZ (current price=50), you conclude that the price of XYZ
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After a detailed analysis on the risks and returns of the stock market and Stock XYZ (current price=50), you conclude that the price of XYZ is unlikely to change a lot during the course of the next 3 months. You decide to bet on this analysis and establish a short straddle position, by simultaneously writing 100 puts and 100 calls with maturity of 3 months and a strike price of 50. The premium you receive for writing each put/call is 2.50.
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What is the maximum profit of your position? What should the stock price be, in order to realize this maximum gain?
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Report the lower and higher bounds for XYZs price 3 months from now that provide you with a non-negative return on your position.
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Draw a profit diagram separately for your a) short position on puts, b) short position on calls, and c) total position
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