27 Jun Consider A “long Strangle” Constructed From Options
Consider a “long strangle” constructed from options which have an expiration date of January 14, 2019. The following table displays the possible prices of Boeing stock on January 14, as well as the payoffs accruing to someone who holds a long strangle on Boeing stock:
| Probability | 0.2 | 0.3 | 0.2 | 0.2 | 0.1 |
| Stock price | $80 | $90 | $100 | $110 | $120 |
| Gain from long strangle | $15 | $5 | $0 | $10 | $20 |
a. What will it cost an investor to buy a long strangle today?
b. A long strangle is created using two options. For each option in the strangle above, indicate whether it is a put or a call, whether it is bought or sold, and calculate what its strike price is. Explain your answer.
c. Why would someone buy a long strangle? Explain carefully.
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