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 $10 per share?

	A.	$15.5
	B.	$25.5
	C.	-4.5
	D.	$45.5

Answer 1

Under long straddle, the trader purchases both call and put for the same strike price with same maturity

Hence, both options will be bought at $40 strike price

Put option is the right to sell the underlying asset at a specified price on a future date.

Call option is the right to buy the underlying asset at a specified price on a future date.

Since the market price at maturity is lower than the strike price, the put option will be exercised and call option will not be exercised

Profit = Selling price – Market price – premium paid

= 40-10-2-2.5

= $25.50

Hence, the answer is B.