Question 2: Peaky Lights LLC is a new asset management boutique offering the general public...
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Question 2: Peaky Lights LLC 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 construct a straddle strategy on a specific stock called Jersey Inc. with the following contract specifications: Expiry Premium Strike Price Call/Put March 2020 $40 $150 Call March 2020 $55 $135 Call $150 Put March 2020 $40 March 2020 $57 $133 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 losses. You can assume the risk free rate is zero. (b) What are the breakeven points of this option strategy? (c) What is the maximum loss? (d) Would you exercise a short straddle if the stock price rises to $245? 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 if you bought the stock at $150 before and the market price is now $10? Explain your
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