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

step 1 Okay, so we are given a scenario of a firm in the short run. What happens if the price of the fi

What is the result if the strike price of the put is higher...

Key Concepts

Payoff Profile

The payoff profile depicts the potential profit or loss across different price levels of the underlying asset at expiration. In a typical strangle, the payoff is minimal if the price remains between the two strikes. Reversing the strikes—having the put’s strike higher than the call’s—results in a payoff that remains constant within that middle price range and then increases or decreases linearly outside this interval, leading to a fundamentally different risk/reward structure.

Put Option

A put option gives the holder the right to sell the underlying asset at a predetermined strike price. In a standard strangle, the put’s strike is usually below that of the call; however, reversing this order by having a higher put strike changes the balance of gains and losses in the strategy.

Strike Price

The strike price is the specific price at which an option can be exercised, meaning the price at which the holder can buy (for a call) or sell (for a put) the underlying asset. The relationship between the strike prices of options in a multi-leg strategy is fundamental, as it determines the moneyness of each option and directly influences the overall payoff profile.

Option Strangle

An option strangle is a strategy that involves holding both a call option and a put option with the same expiration date but different strike prices. Typically, the call’s strike is set above the put’s strike so that both options are out-of-the-money at the start, allowing the investor to profit from a significant price movement in either direction.

Call Option

A call option provides the right to buy the underlying asset at a specified strike price. In strategies like the strangle, the call is typically positioned with a strike price above the current price of the asset, but if its strike price is set below that of the put, the typical risk and reward characteristics are altered.

Transcript

00:01 Okay, so we are given a scenario of a firm in the short run.

00:07 What happens if the price of the fixed factor is increased? what will happen to the profits? okay, so in the short run, we are going to just assume a firm in a perfectly competitive market for illustrative purposes.

00:25 You normally find that the average cost curve as well as the marginal cost curves to denoted as such okay so we assume okay so in this axis we have revenues and we have quantities on the on the horizontal axis okay so we are going to assume that the price which is fixed because the firm is a price taker is at this point let's say p -o this is the demand curve which also serves as the marginal revenue curve and the way would denote the profitability of this firm is where marginal costs and marginal revenue intersect okay you might as well add average revenue here in this case this is a firm in a perfectly competitive market so the profits is denoted by the differences here we have the this is obviously the the average this the average cost okay so this entire area represents the profit of the firm all right um at q1.

02:03 Okay, so let's just make it qo in order to relate it to the price at which the product is being sold.

02:14 Okay, so if this is the profit, the shaded area here, right, then what happens as a result of an increase in the price of a factor? okay, so generally you would find a shift in the average cost curve so we're going to see a shift in the average cost curve.

02:36 Let's say to ac1.

02:38 So what we then have is a new profit.

02:46 We now have a new ac...

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