-
Essay / Lululemon Case Study - 1393
The investor takes long and short positions in the same underlying with the same strike price and expiration date. For the execution of this strategy, I have selected the stocks of SunEdison Inc. the company is in the process of restructuring its operations and revamping its business strategies. These measures, if they succeed in increasing revenues, can increase the price of the company and vice versa. The strike price of the call and put options is $8. Only one contract was retained for these two options. The total cost of the straddle is $103 ($12 + $91), which is also the maximum loss under the strategy. The maximum profit in case of price rise is infinite and the maximum loss in case of price fall. The maximum loss is the strike price of the put option minus the total cost of the premium, which in this case is $697 [($8-1.03)*100]. There are two equilibrium prices in case of straddle and both are calculated by adding and subtracting the total cost from the strike price. In the case of SunEdison Corp, the equilibrium prices are 9.03 and 7.97 as shown in the diagram.