Question

You expect the price of GE to not change very much in the next month, so you go short on (sell) a straddle (a put and a call at the same strike) on 100 shares of GE, with a strike price of $25.1. The premiums on the put and the call are each $0.77. If the price at maturity is $22.2, what is your profit from this position?

Answer 1

Holder of call option will exercise the OPtion if STock price > Strike price on maturity date.

Holder of Put option exercise the option if Stock Price < Strike Price on maturity date.

Short straddle means, Short a put option and short a call option at same strike price.

Given Stock price = $ 22.2

Strike Price = $ 25.1

As Stock price < Strike Price, Call option will not be exercised and Put option is exercised.

Loss from Put option = Strike Price - Stock Price

= $ 25.1 - $ 22.2

= $ 2.9

Premium Received = $ 1.54 ( $ 0.77 + $ 0.77 )

Net Loss = $ 1.36

No. of shares = 100

Total loss = 100 * 1.36

= $ 136