Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Suppose the DJIA stands at 11.700. You want to set up a long straddle by purchasing 100 calls and an equal number of puts on
Suppose the DJIA stands at 11.700. You want to set up a long straddle by purchasing 100 calls and an equal number of puts on the index, both of which expire in three months and have a strike of 117. The put price is listed at a $1.75 and the call sells for $2.75 a. What will it cost you to set up the straddle, and how much profit (or loss) do you stand to make if the market falls by 900 points by the expiration dates on the options? What if it goes up by 900 points by expiration? What if it stays at 11.700? b. Repeat part a, but this time assume that you set up a short straddle by sellinglwriting 100 July 117 puts and calls c. What do you think of the use of option straddles as an investment strategy? What are the risks. and what are the rewards? a. To set up the long straddle, it will cost $I (Round to the nearest dollar Enter a positive number for the cost If the market on the long straddle falls by 900 points by the expiration dates on the options. the profit (or loss) is Round to the nearest dollar Enter a positive number for a profit and a negative number for a loss If the market goes up by 900 points by the expiration dates on the options, the profit (or loss) is Round to the nearest dollar. Enter a positive number for a profit and a negative number for a loss. lf the market stays at 11,700 by the expiration dates on the options, the profit (or loss) is s (Round to the nearest dollar Enter a positive number for a profit and a negative number for a loss b. Your revenue from setting up the short straddle is s (Round to the nearest dollar) If the market on the short straddle falls by 900 points by the expiration dates on the options. the profit (or loss) is s Round to the nearest dollar Enter a positive number for a profit and a negative number for a loss If the market goes up by 900 points by the expiration dates on the options, the profit (or loss) is Round to the nearest dollar. Enter a positive number for a profit and a negative number for a loss. lf the market stays at 11,700 by the expiration dates on the options, the profit (or loss) is s (Round to the nearest dollar Enter a positive number for a profit and a negative number for a loss
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started