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Question 2 (8 Points) The current price of a non-dividend paying stock is 40. [Ignore time value of money} The following table shows call and
Question 2 (8 Points) The current price of a non-dividend paying stock is 40. [Ignore time value of money} The following table shows call and put option premiums for three-month European of various exercise prices: Exercise Price Call Premium Put Premium 35 6.13 I144 40 2.78 1.99 45 0.97 5.08 A trader interested in speculating on high volatility in the stock price is considering two investment strategies; straddle or strangle. a) Explain how a straddle and strangle spread can be created to speculate on high volatiliyj. b} Construct a table showing the payoff] profit of strangle. c) Construct a table showing the payoff] profit of straddle. d) Draw profit diagram of both straddle and strangle spread on the same graph. Carefully label the levels and turning points such as maximum profit, maximum loss, and break-even price on the graph. e] Determine the range of stock prices in 3 months for which straddle outperforms strangle
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