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?

What will be net profit/loss per share on a short straddle (not long straddle) if the stock price is $40 per share?

What will be net profit/loss per share on a long bull call spread if the stock price is $70 per share?

  What will be net profit/loss per share on a long call (use K=$40 call) if the stock price is $55 per share?

What will be net profit/loss per share on a long collar (use K=$65 call) if the stock price is $5 per share?

What will be net profit/loss per share on a protective put  if the stock price is $10 per share?

What will be net profit/loss per share on a covered call strategy (use K=$40 call) if the stock price is $55 per share?

What will be net profit/loss per share on a protective put if the stock price is $5 per share?

Answer 1

Answer(1): Long straddle- This strategy is adopted when investor expects big movements in the market or for a particular security. He buys a call and a put of the same strike price, underlying and expiry date.

In this question, I buy a Call strike $40 at $2.50 and buy a Put strike $40 at $2 of same underlying and expiry.

Now on expiry (Dec. 21, 2021), Stock price is at $20 per share-

Profit from holding the stock= Selling price - Buying price

Profit from holding the stock: 20-11 = $9

Loss from long call = Premium paid only

Loss from long call = $2.5

Profit from Put = Strike - Spot - Premium paid

Profit from Put: 40 - 20 - 2 = $18

Net profit from the Long straddle: (9 + 18 - 2.5) = $24.5