Question

Construct a long strap using the 170 strike options. Identify the break-even prices? The options for Microsoft (stock price $165.13) are trading at the following prices:
Strike     Call        Put
$165       $8.10      $6.75
$170       $3.25      $7.50

		$142 and 177
		$142 and 179
		$156 and 177
		$156 and 179

Answer 1

A strap is constructed by buying 2 call options at the money and buying one put option at the money

So strap is constructed for Microsoft by buying 2 , 170 call options and one 170 put option

Total premium paid = 3.25 * 2 + 7.50 = 14

If stock goes down, the value of call option will go to 0 thereby giving a loss of 6.50 and to recover that loss the put option must provide a profit of 6.50

Put option will provide a profit of 6.50 at (170 - 7.50 - 6.50 = 156). Hence 1st breakeven is 156

If stock price goes up then value of put becomes 0 and loss incurred is 7.50.

The call options have to provide a profit of 7.50 together ( 3.75 per option )

Breakeven price = 170 + 3.25 + 3.75 = 177

Correct choice 156 and 177