Question

Assume you create a straddle for stock XYZ with a strike price of 120. The cost of the put (X=120) is 5 and the cost of the call (X=120) is 7. The current stock price is 120.40.

1. What are the breakeven prices for this strategy:

108.00 and 132.00

123.00 and 125.00

123.60 and 125.60

115.00 and 127.00

115.40 and 127.40

2. If the stock price at expiration (S₁) is 110. The $ gain/loss from this strategy is:

gain of 4.60

loss of 2.00

gain of 10.00

gain of 3.40

loss of 11.60

3. If the stock price at expiration (S₁) is 140. The % gain/loss from this strategy is:

gain of 8.33%

gain of 14.86%

gain of 16.28%

gain of 66.67%

gain of 85.71%

Answer 1

Call option is the right to buy the underlying asset at a specified price on a future date

Put option is the right to sell the underlying asset at a specified price on a future date

Break even prices under straddle = Strike price + Premium paid, Strike price – Premium paid

= 120+12, 120-12

i.e. $132 and $108

108.00 and 132.00

2. Call Option will not be exercised while put option will be exercised

Gain = (120-110) – 12

= -$2

loss of 2.00

3.Call option will be exercised while put option will not be exercised

Gain = (140-120)-12

= $8

Gain % = 8/12

= 66.67%

gain of 66.67%