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You anticipate that the volatility of the Encana stock price will increase over the next year, and you are considering two possible strategies to speculate
You anticipate that the volatility of the Encana stock price will increase over the next year, and you are considering two possible strategies to speculate on this: a straddle with strike $65 and a strangle with strike $60 for the put option, and $70 for the call option, respectively; all options have a 1-year maturity. Assume that the current value of the Encana stock is $62 per share and the annual continuously compounded interest rate is 4%. The time 0 premiums of these options can be found in the table below: Strike Price Call Price Put Price $60 $9.25 $5.16 $65 $7.20 $7.65 $70 $5.36 $10.61 a) Construct and graph the profit function for the straddle. b) Construct and graph the profit function for the strangle. c) For what values of the asset price at maturity, the strangle is more profitable than the straddle. (Note: Make sure to show the coordinates of all break-even points (i.e. the x-axis coor- dinates for which the y-coordinate is 0) when constructing the graphs of these payoffs.) You anticipate that the volatility of the Encana stock price will increase over the next year, and you are considering two possible strategies to speculate on this: a straddle with strike $65 and a strangle with strike $60 for the put option, and $70 for the call option, respectively; all options have a 1-year maturity. Assume that the current value of the Encana stock is $62 per share and the annual continuously compounded interest rate is 4%. The time 0 premiums of these options can be found in the table below: Strike Price Call Price Put Price $60 $9.25 $5.16 $65 $7.20 $7.65 $70 $5.36 $10.61 a) Construct and graph the profit function for the straddle. b) Construct and graph the profit function for the strangle. c) For what values of the asset price at maturity, the strangle is more profitable than the straddle. (Note: Make sure to show the coordinates of all break-even points (i.e. the x-axis coor- dinates for which the y-coordinate is 0) when constructing the graphs of these payoffs.)
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