Suppose the DJIA stands at 12,500. You want to set up a long stranddle by purcha

Question

Suppose the DJIA stands at 12,500. You want to set up a long stranddle 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 125. The put price is listed at 1.50 dollars and the call sells for 2.50 dollars. Whats will it cost you to set up the straddle, and how much profit do you stand to make if the market falls by 800 points by the expiration dates on the options? What if it goes up ny 800 points by expiration? What if it stays at 12,500? Repeat part a, but this time assume that you set up a short straddle by selling writing 100 july 125 puts and calls. What do you think of the use of option straddle as an investment strategy? What are risks, and what are the rewards? To set up the long straddle, it will cost

Explanation / Answer

Answer:

Starddel is good to pursue due to stock price will move significantly.

An option strategy with which the investor holds a position in both a call and put with the same strike price and expiration date.In this strategy, the investor assumes that the price of an underlying stock is volatile and thus is expected to move significantly by the expiration date. Two Types of straddle position

1.Long Straddle - The long straddle is designed around the purchase of a put and a call at the Exact same strike price and Expiration date. The long straddle is meant to take advantage of the market price change by exploiting increased Volatility.

2. Short Straddle - The short straddle requires the trader to sell both a pull and a call option at the same strike price and expirtion date.By selling the options a trader is able to collect the premiumas a profit.

Risk and Reward of Long Straddle :-

a. Expense

b.Risk of loss

c. Lack of Volatility

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