Question

A long strangle is created by buying a slightly out of the money put and a slightly out of the money call with the same expiration date.

The market price of MSFT is $184.00.

The June 5 $195.00 calls have a premium of $1.70

The June 5 $175.00 calls have a premium of $3.70

a) What is the most an investor can lose on this position?

b) What does the price of MSFT need to be for the investor to break even?

Answer 1

a) most loss will occur when both the options are expired out of money that mean that the price on expiry is between 195 and 175

So his maximum loss will be premium paid

So loss = 1.7 + 3.70 = 5.4

B) for break even either of option should have expired in money with Value of 5.4 as 5.4 is premium paid

Let assume call option expired in money

Price should be = 195+5.4 = 200.4

Let us assume put option expired in money

Price should be price should be = 175 - 5.4 = 169.6

For break even price should be 200.4 or 169.6