Question

There is a great deal of uncertainty in the markets about the future prospects of XYZ company. You decide to buy a straddle on XYZ, buying 300 shares each of put and a call option with a strike price of $111. The put is trading at $4 and the call is trading at $5.3. At maturity, XYZ is priced at $107.4. What is your net profit on this position?

Answer 1

Strike price = $111.00

Price on maturity date = 107.40

Value of call option = Market price - Strike price(Subject to 0. It cannot be negative)

=107.40 - 111

0

Profit on call option = V.C. - premium paid

= 0-5.3

= -5.30

Loss of $5.30

Value of put option = Strike price - market price

= 111 - 107.4

= 3.6

Profit on put option = V.P. - premium paid on put option

= 3.6 - 4

= -0.4

Loss of $0.4 per option

Total loss = No. Of call option * loss per option + No. Of put options* loss per option

= 300*5.30 + 300*0.4

= 1590 + 120

= 1710

So, net loss on this position is $1,710. In other words, profit is -$1710

Please thumbs up.