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 short straddle (not long straddle) if the stock price is $40 per share?

		$4.5
		-$4.5
		$10.5
		$25.5

Answer 1

Under short straddle, the trader sells both call and put for the same strike price with same maturity

Hence, both options will be sold 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 same as the strike price, the option buyer will be indifferent between exercising the options or not.

Profit = Premium Received

= $2+$2.5

= $4.50

Hence, the answer is $4.5 profit