ADMS 1000 Lecture Notes - Lecture 32: Straddle, Call Option, Spot Contract

• School: York University
• Department: Administrative Studies
• Course: ADMS 1000
• Professor: Alan Shapiro

Document Summary

The higher break-even point is equal to the call option strike price plus both premiums (. 195 . 15 $. 045). However, the advantage of a short strangle relative to a short straddle is that the underlying currency has to fluctuate more before the strangle writer is in danger of losing money. The euro example is next used to show that the worksheet and contingency graph for the short strangle are exactly opposite to those of a long strangle. Higher break-even point is equal to the call option strike price plus both premiums (. 195 . 15 $. 045). The maximum loss for a long strangle occurs at euro values at option expiration between the two strike prices. At any future spot price between the two exercise prices, the straddle buyer would lose both option premiums ($. 045 $. 025 $. 02). The contingency graph for the long strangle illustrates that the euro must fluctuate more widely than with a straddle before the position becomes profitable.