An investor expects a moderate rise in the price of

Solution

The net profit for the investor = total payoff – total premium paid   ·        Total Premium Paid by investor = Call option premium + Put option premium                                                             = 45 + 35 = Rs.80   ·        Call Option Payoff: Since stock price of Rs.2950 > the strike of Rs.2800, the call is in-the-money. Call option payoff = 2950-2800 = Rs.150   ·        Put Option Payoff: Since stock price of Rs.2950 > the strike of Rs.2700, the put is out-of-the-money. As such, the investor will not exercise it and the payoff is 0.   The net profit for the investor = total payoff – total premium paid                                                 = 150 + 0 – 80                                                 = Rs.70   This options strategy is known as Long strangle. The investor buys both an out-of-the-money (OTM) call and an OTM put option on the same stock with the same expiration date, betting on a large price move in either direction, but unsure of the direction, profiting from high volatility.