Question

Assume greg created a straddle combination. if the cost of each call was $1.50 and the cost of each put was $1.75, what will his profit from the strategy if the underlying stock price ultimatley reaches $15. The strike price on the options is $10 and greg has 5 contracts of each option.

Answer 1

Call Option is the right to buy the underlying security at a specified price on a future date

Put Option is the right to sell the underlying security at a specified price on a future date

The call option will be exercised as strike price is lower than the market price

Put option will not be exercised as strike price is lower and hence, it is better to sell in the market

Profit = (15-10)*5*100 - 1.50*5*100 - 1.75*5*100

= $875

Assuming one contract hass 100 shares