Question

The following information is available on company ABC.

                                _{CALLS    PUTS}

ABC   X         MAR   APR   MAY     MAR   APR   MAY

119  120          6        8        11          1         3        4

119  125          2        5          8           2          4       6

119  130          1        3          6           5          7       9

You create a (long) straddle using the May maturity and the strike price of $120. What are the breakeven stock prices at expiration for this straddle?

		None of these answers are correct
		$100 and $125
		$105 and $135
		$110 and $130
		$95 and $115

Answer 1

Straddle is long call option and long put option with same strike price and same expiry.

Premium for May month call option with strike price of $120= $11

Premium for May month put option with strike price of $120= $4

Therefore, premium paid for long straddle = $15

Therefore breakeven for straddle will be $15 above and $15 below the strike price of $120

Therefore breakeven points: $120+$15; $120-$15

Therefore breakeven points: $135; $105

Therefore 2nd option is correct.