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You are asked to implement two strategies below on MSFT (Microsoft) stock:
- Straddle: Buy a put and a call with a strike price of $175 and an expiration date in October 16, 2020.
- Strangle: Buy a put with a strike price of $165 and a call with a strike price of $185. Both the put and a call expire in October 16, 2020.
Note, the following are prices for the calls and puts with the expiration in October 16, 2020:
A call on MSFT with a strike price of $185 costs $11.75.
A call on MSFT with a strike price of $175 costs $16.19.
A put on MSFT with a strike price of $175 costs $17.32.
A put on MSFT with a strike price of $165 costs $11.57.
Note, the current price of MSFT stock is $175.
Please clearly outline the pros and cons of each of the two strategies. Under which conditions or assumptions you prefer one strategy to another?
Also are these graphs correct?
Strategy A 200 150 100 50 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 15 60 170 180 190 200 210 220 230 240 -50 Payoff Net Payoff Strategy B 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 15160 170 180 190 200 210 220 230 240 -50 - Payoff -Net Payoff
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