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You are asked to implement two strategies below on MSFT (Microsoft) stock: ...

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Finance

You are asked to implement two strategies below on MSFT (Microsoft) stock:

  1. Straddle: Buy a put and a call with a strike price of $175 and an expiration date in October 16, 2020.
  2. 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?

imageimage

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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