Suppose the DJIA stands at 11,800. You want to set up a long straddle by purchasing 100 calls and an equal number of puts on theindex, both of which expire in three months and have a strike of 118. The put price is listed at $1.50 and the call sells for $2.50.

a. What will it cost you to set up thestraddle, and how much profit(or loss) do you stand to make if the market falls by 900 points by the expiration dates on theoptions? What if it goes up by 900 points byexpiration? What if it stays at 11,800?

b. Repeat part a, but this time assume that you set up a short straddle by selling/writing 100 July 118 puts and calls.

c. What do you think of the use of option straddles as an investmentstrategy? What are therisks, and what are therewards?