Question 5: Bet on the Volatility

In the most recent Berkshire Hathaway's annual meeting in Omaha, NE, Warren Buffett said he shed a third of his holdings in IBM due to the highly competitive environment IBM is facing. Shortly after, "Mad Money" Jim Cramer expressed his still bullish outlook for the company by pointing out some possible transformational acquisitions IBM could make for new growth opportunities. Nevertheless, the two ideas represent the mainstream now. Suppose you are not sure about the direction of the stock price movement but believe the stock price of IBM will be more volatile than usual in the next three months, you want to bet on the volatility. You are looking at a call option on IBM with strike price of $155 selling at $3.75 and a put option with strike price of $155 selling at $4.84 (real time market data on May 7, 2017). Both options will expire on Jul. 21, 2017. What option trading strategy you can employ based on the above two options so you could exploit the possible highly volatile IBM stock price movement in the next three months? Plot the trading strategy profit diagram and point out in what price range your trading strategy will see a profit.