Q$1.$

Scenario:

Suppose a company, XYZ Inc., is about to announce its quarterly earnings in two weeks, and significant volatility in its stock price is expected due to uncertain market sentiment about the results. Assume the current stock price of XYZ Inc. is $$50.$

Straddle Setup:

An investor anticipates significant price movement but is unsure of the direction $($up or down$).$ To capitalize on this expected volatility, the investor uses a straddle strategy by purchasing both a call option and a put option on XYZ Inc. shares.

Call Option: Buy a call option with a strike price of $$50($at$-$the$-$money$),$ expiring in one month, for a premium of $$3.$

Put Option: Buy a put option with the same strike price of $$50$ and the same expiration, also for a premium of $$3.$

$.$ Draw a diagram to explain the profit and loss possibilities of the position.

ii$.$ What is the possible loss and when does it occur?

iii. How does your answer change if the cost of the put option is $5$$$?$