Question

On December 21, 2020, you purchased 100 shares of ABC company at $11 per share. You plan to sell your shares on December 21, 2021 and are concerned about downside risk. A put option on ABC stock with an exercise price (K) of $40 is currently priced (P) at $2 per share. Also, two call options on ABC stock with exercise prices (K) of $40 and $65 are priced (C) at $2.5 and $1.50 per share, respectively. All options expire on December 21, 2021. What will be net profit/loss per share on a long straddle if the stock price is $20 per share?

Answer 1

A long straddle is an option strategy in which one call and one put bought at same strike price and expiry date.

In given case,

To construct a Long straddle:

Long Call ($40)

Long Put ($40)

Strike price (K) = $40

Call Price (C) = $2.50

Put Price (P) = $2

Stock Price on expiration (ST) = $20

Net Profit and Loss (P/L) per share on long straddle can be computed with following equation: