Peaky Lights ILIC is a new asset management boutique offering the general public the opportunity…

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Question 2:

Peaky Lights ILIC is a new asset management boutique offering the general public the opportunity to invest in some derivative instruments such as stock options, as well as a broad range of international stocks. As the specialist in European options, you have been given the task to tru consct a straddle strategy on a specific stock called Jersey Inc. with the following contra specifications:

Expiry Premium Strike Price CalVPut

– March 2020 $45 $120 Call – March 2020 S55 $135 Call – March 2020 545 $120 Put – March 2020 S57 S125 Put

(a) Construct a long straddle strategy, showing clearly the long strategy Profit and Loss diagram. Part of your working should include a table with Jersey’s stock prices and respective profit and loss.. ignore the risk free rate in your calculations.

(b) What arc the breakeven points of this option strategy? (c) What is the maximum profit? (d) Would you exercise a short straddle if the stock price rises to 5200? Explain your answer and clearly show any resulting profit or loss. (e) Why would you recommend a long straddle as opposed to investing outright in the stock market at a price of S120? Explain your answer.

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