Question

A slight variation of a straddle is a strap, which consists of using two calls and one put. Construct a long strap using options with exercise price $165. The price of the call option is $8.10 and the price of the put option is 6.75. Hold the position until expiration. Determine the profits and graph the results. Identify the break-even stock prices at expiration and the minimum profit. What is the difference of a strap relative to a straddle?

Answer 1

Profit of a long call option = Max[S-X, 0] - P

Profit of a long put option = Max[X-S, 0] - P

S = underlying price at expiry,

X = strike price

P = premium paid

The second part of the table :

The second part of the table :

The formulas are below :

The formulas are below :

The formulas are below :

The formulas are below :

The graph is below :

The graph is below :

breakeven stock prices are $176.475 and $142.05

minimum profit (maximum loss) = total premium = $22.95

The difference between a straddle and a strap is that in a straddle, 1 each of the call and put options are bought, whereas in a strap, 2 call options and 1 put option are bought.