You observe the following market for European Call and Put options on the S&P 500 ETF: Today Spot index level: 10th January 2023 407 Maturity: 17th February 2023 Strike 403 404 Calls 7.06 5.92 4.79 3.66 2.57 2.57 2.63 2.73 2.85 Maturity: 17th March 2023 Calls 8.69 7.40 405 406 407 408 409 410 411 6.12 4.85 3.58 3.73 3.93 4.16 4.42 Strike 403 404 405 406 407 408 409 410 411 Puts 2.21 2.07 1.93 1.81 1.71 2.71 3.77 4.87 5.99 Puts 3.21 2.93 2.64 2.36 2.09 3.23 4.43 5.66 6.92
The Scenarios: You work in the
Scenario A: GDP will rise 3%. This will send the S&P ETF to 414.
Scenario B: GDP will stagnate. S&P ETF will stay at 407.
Scenario C: GDP will fall 2%. This will send the S&P ETF to 400.
Question
Compute the payoff and net payoff in the three scenarios above of a strategy made of two legs:
Leg 1: a long straddle with maturity in February and strike 407.
Leg 2: a short straddle with maturity in March and strike 407.
Use the data in Table 2.
Discuss why an investor might be interested in trading this strategy. What is the investor betting on?
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