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?

	A.	$15.5
	B.	$25.5
	C.	-$4.5
	D.	$35

Answer 1

X = The strike price = $40

St = The stock price at expiry = $20

Long straddle is constructed by buying a put option and a call option at the same strike price

Put option price = $2

Call option price = $2.5

Total straddle price = 2 + 2.5 = $4.5

Payoff of call option = max(St - X, 0)

Payoff of call option = max(20 - 40 ,0) = 0

Payoff of put option = max(X - St, 0)

Payoff of put option = max(40 - 20, 0) = 20

Long straddle profit = Payoff of call option + Payoff of put option - Total straddle price

Long straddle profit = 0 + 20 - 4.5

Long straddle profit = $15.5

Option A is correct