Question

You anticipate high volatility in AAPL over the next two months so you are interested in entering a long straddle position, which consists of long positions in a put and a call with the same strike price. The current AAPL price is $180 per share. The April 2018 call and 1 put premiums for a $180 strike price are $4.80 and $4.50, respectively. Over what range(s) of April stock prices is the AAPL long straddle position profitable?

Answer 1

Long Straddle position -> Long position in put and call with same strike price.

Long Straddle will have unlimited profit with limited risk. Loss occurs only when the underlying of the option is equal to the strike price.

And so any price which is greater or lesser than the strike price will be profitable. But here there is cost involved. The premium of $4.80 and $4.50 is the cost involved.

The total cost = $4.80+$4.50 = $9.30

In order to take the cost out of profit, the underlying stock price must not be between stock price plus or minus the total cost

Therefore, this position will be profitable when the underlying stock price is greater than (strike price+total cost) and lesser than (strike price - total cost)

(i.e) (180+9.30) < x < (180-9.30)

189.30<x<170.70