Today is Feb 1, 2019. You own 1 share of AMZN (Amazon.com, Inc.) stock which is currently trading for $1635 per share. You expect the stock price will change significantly in the next two months, but are unsure whether it will be a profit or a loss. You hope the price will increase but also don't want to suffer if the price were to fall in the short term.

You want to trade options on AMZN stock to capitalize if the stock price goes up but to still be protected if the stock price drops. You are considering two option strategies.

You will use AMZN options that mature on March 22, 2019, approximately one and a half months from today. The current option prices can be found in the table below. The option prices are per share of the underlying stock. You receive money when you sell an option and pay money when you buy an option. Ignore the time value of money.

For March 22, 2019

Strike price Call Put

K = 1535 155 32

K = 1635 72 70

K = 1735 40 127

QUESTION:

a) Straddle: In this strategy, you will buy 1635 call and 1635 put with to cover 1 share.

i. Compute the investment required to cover 1 share.

ii. For each stock price at $50 increments within a range of $1385 and $1885, plot (1) the profit or loss on the options, (2) the profit or loss on the stock from the current stock price, and (3) the overall profit or loss of the stock plus options at option maturity.

iii. What is your maximum possible loss using the straddle?