Question

XYZ Stock currently trades for $45 per share. You find the following options matrix (prices of calls and puts) for a June 1st expiration date (which applies for all)

40 strike call option: $9                                40 strike put option: $2

45 strike call option: $4                                45 strike put option: $4

50 strike call option: $2                                50 strike put option: $9

55 strike call option: $1                                55 strike put option: $15

You believe that XYZ will be extremely volatile in the next month and so you purchase one ATM straddle. In order to make money (have a positive ROI) on this position, the value of a share of XYZ stock at the June 1st expiration must be either below ___

Answer 1

Straddle is an option strategy in which trader buys a call option and put option of the same expiry of the same stock.

The trader is buying the at the money straddle which means he will buy call option and put options of 45 strike.

To gain from the straddle, the rise of the fall in the stock must be higher than the premium paid on the call and put.

So the question is asking about gaining on the put option on the straddle so it must and below the (strike price-premium paid)

=[45-4-4]

= $ 37.

So the value of share must be either below 37 or above 53(45+4+4).