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Determine the profit per share on the straddle strategy

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Question - Linda is a portfolio manager in the U.S. The U.S. has bid to be the host country for a major international sports tournament. The host country will be announced in three weeks. Linda believes that the share price of Sunnyside Hospitality, a hotel operating company, will be significantly influenced by the outcome of the bid to host the tournament. If the U.S. is selected, she believes that Sunnyside's share price would rise significantly. If the U.S. is not selected, she believes that Sunnyside's share price would fall significantly. Linda wants to profit from her beliefs by implementing a straddle strategy using options. She gathers the information shown in Exhibit 1.

Exhibit 1: Sunnyside Hospitality Share and Options Data

Current share price of Sunnyside Hospitality: US$ 8.80

Price of one month call option, exercise price US$ 9.00: US$ 0.38

Price of one month put option, exercise price US$ 9.00: US$ 0.57

Determine each of the following (show your reasons/calculations to support your answers):

(a) the profit per share on the straddle strategy if the U.S. wins the bid and Sunnyside's share price doubles.

(b) the share price(s) of Sunnyside at which breakeven occurs for the straddle strategy.

Reference no: EM132785960

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