PROBLEM 8

The stock price for Chevrolet is $35. An investor believes that the stock price will experience significant volatility in the following six months but is uncertain about the direction of the share price movements. He decides to use a long straddle strategy by buying both a put and a call option for Chevrolet, with the same expiration date in 6 months and the same strike price of $35. The investor paid a premium of $2.77 for the call option and a premium of $1.17 for the put option.

1) What will be the net profit or loss for the investor if the stock price is $39 on the expiration date of the options?

2) Investor B believes that Chevrolet stock price will stay in a narrow range around $35 in the next 6 months. He decides to sell a straddle by selling both a put option and a call option for Chevrolet, with the same expiration date in June and the same strike price of $35. What will be the net profit or loss for the investor if the stock price is $32.35 on the expiration date of the options?

3) How far can the stock price move in either direction before the net profit of investor B becomes negative (in $)?