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Help me solve question a Below you find the pay-off profile of the strategy that...

May 26, 2024

Help me solve question a

Solution

a

To achieve the given pay-off pattern, we need to use a combination of options strategies. Here’s a step-by-step breakdown: 1. Initial Flat Line (3500 to 3750): - Strategy: Buy a put option. - Strike Price: 3750. - Explanation: This ensures that the pay-off remains flat until the price reaches 3750. 2. First Triangle (3750 to 4250): - Strategy: Sell a put option. - Strike Price: 4000. - Explanation: Selling a put option at 4000 will create a peak at 4000, as the pay-off increases up to this point and then decreases. 3. Second Triangle (4250 to 4750): - Strategy: Buy a call option. - Strike Price: 4500. - Explanation: Buying a call option at 4500 will create another peak at 4500, as the pay-off increases up to this point and then decreases. 4. Final Flat Line (4750 to 5000): - Strategy: Sell a call option. - Strike Price: 4750. - Explanation: Selling a call option at 4750 ensures that the pay-off remains flat after this point. 5. Doubling the Amount of Options: - Strategy: Double the amount of options at the peaks. - Explanation: To achieve the sharp peaks, we need to double the amount of options at the strike prices of 4000 and 4500

Answer

To achieve the given pay-off pattern, use a combination of buying and selling put and call options at specific strike prices, and double the amount of options at the peaks.

Key Concept

Options Strategy

Explanation

The pay-off pattern is achieved by strategically buying and selling put and call options at specific strike prices and doubling the amount of options at the peaks to create the desired pay-off profile.