Assignment 3: Options Payoffs and Trading Strategies

Problem 11.17

What is the result if the strike price of the put is higher than the strike price of
the call in a strangle?

In a strangle, sometimes called a bottom vertical combination, an investor buys

a put and a call with the same expiration date and different strike prices. The
result is shown in figure below. The profit pattern from a long position in a call
and a put is much the same when:

a) the put has a higher strike price than a call

b) when the call has a higher strike price than the put. But both the initial
investment and the
final payoff are much higher in the first case.

Profit Pattern