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 is the cash flow at maturity (CF_T) if the stock price of ABC at the May expiration is $122?

		None of these answers are correct
		+$100
		-$100
		-$300
		+$300

Answer 1

In a Straddle strategy, we buy a call option and a put option of the same strike price and same expiry. Thus, in the question we are selecting the following:

• Strike Price = $120
• Expiry = May

Buy Price (Premium paid):

• Call ($120 , May) = $11 * Lot Size
• Put ($120 , May) = $4 * Lot Size

Sell Price at expiry (the stock expires at $122)

• Call ($120 , May) = $2 * Lot Size (as the market closed $2 above the strike price)
• Put ($120 , May) = $0 * Lot Size (as the market couldn't close below the strike price)

Profit / Loss:

• Call ($120 , May) = Sell price - Buy price = $2 - $11 = -$9 * Lot Size
• Put ($120 , May) = Sell price - Buy price = $0 - $4 = -$4 * Lot Size

Total Loss in the strategy = (-$9) + (-$4) = -$13 * Lot Size

**Lot Size of the Option contract is not mentioned in the question