
a
To draw: A payoff graph to depict the portfolio in which a call option is written at strike price $195 and a put option is written at an exercise price of $190 in the month of January.
Introduction:
Payoff graph: It is supposed to be a graphical representation of potential outcomes of a strategy. The vertical axis depicts the profit/loss on option expiration day while the horizontal axis depicts the underlying asset price on expiration day.
b.
To compute: The profit or loss on the position where IBM sells an option at $198 and $205 on expiry date and after effect of selling at $160.
Introduction:
Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.
c.
To evaluate: The break-even point of investment at two stock prices.
Introduction:
Break-even point on investment: This specifies when an investment will start generating a positive return. This can be computed easily with simple mathematics.
d.
To analyze: The kind of betting the investor is making and the belief of investor to justify the stock price.
Introduction:
Strangle strategy: It is a situation where the investor has control over both call option and put option of the same asset. These options have different strike prices with the same expiry date. An investor makes use of this strategy when he/she is not sure about the increase or decrease in price.

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Chapter 20 Solutions
Investments
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