Posted: September 13th, 2017

Advanced Business Finance. (Option Pricing Theory)

Your believes the share price of Jumpy Ltd., currently selling at $58 a share, could move substantially in either direction in response to a court decision involving the company. She owns no Jumpy shares at present but seeks your advice on implementing a strangle strategy using Jumpy share options. You observe the following market information for Jumpy options:

1. Explain to your client how he strangle should be implemented, with appropriate diagrams for illustration.
2. Calculate and explain to your client the maximum potential loss and gains on the strategy and the breakeven share price/s at option expiration.