Donna Donie, CFA, has a client who believes the common stock price of TRT Materials (currently $58 per share) could move substantially in either direction in reaction to an expected court decision involving the company.
The client currently owns no TRT shares, but asks Donie for advice about implementing a strangle strategy to capitalize on the possible stock price movement. Donie gathers the TRT option pricing data shown below. Note: A long strangle is similar to a long straddle but involves purchasing a put option at K1 and purchasing a call option at K2 where K1 < K2.
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Call Option
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Put Option
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Price
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$5
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$4
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Strike price
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$60
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$55
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Time to expiration
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90 days
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90 days
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Strangles Should Donie choose a long strangle strategy or a short strangle strategy to achieve the client's objective? Justify your recommendation with one reason.