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You establish a straddle on Walmart using September call and put options with a strike price...

You establish a straddle on Walmart using September call and put options with a strike price of $68. The call premium is $5.15 and the put premium is $5.90.

a. What is the most you can lose on this position? (Input the amount as positive value. Round your answer to 2 decimal places.)

Maximum loss $ 11.05

b. What will be your profit or loss if Walmart is selling for $77 in September? (Input the amount as positive value. Round your answer to 2 decimal places.)

Loss of $ 2.05

c. At what stock prices will you break even on the straddle? (Input your answers from highest to lowest to receive credit for your answers. Round your answers to 2 decimal places.)

Break even prices $_____ and $_____

*Need help with question C only.

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Answer #1

c)

Straddle position is created by buying a call and put option of same strike price Strike Price (X Call premium (c Put Premium (p $5.15 $5.90 Total investment -Call premium +Put Premium 10 $11.05 D6+D7 12 Breakeven price will be at which the profit is zero Profit on Straddle Profit on call option Profit on put option 14 15 16 17 Profit of Call option buyer is given by following equation: Profit of Call option Max(Sr-X,0) -C where ST is stock price at maturity, X is exercise price and c is premium paid to buy the Call option. 19 Profit of put option buyer is given by following equation: Profit of put options Max(X-ST,0)-p where ST is stock price at maturity, X is exercise price and p is premium paid to buy the put option 21 Thus profit of straddle can be calculated as: Profit on Straddle 24 Profit on call option Profit on put option Max(ST-X,0)-c + Max(X-S-,0)-p 26 27 When Stock price is above srike price i.e. Sr>X Profit on Straddle 29 Profit on call option Profit on put option 31 When Stock price is below the srike price i.e. STX Profit on Straddle 32 Profit on call option Profit on put option -c+(X-S)-p 35 36 Since breakeven stock price will be at which the net profit is zero, therefore Breakeven price if stock price is higher than strike price 38 39 $79.05 D5+D6+D7 Breakeven price if stock price is lower than strike price 41 42 43 EX-C-p $56.95 -D5-D6-D7 Hence breakeven prices are $56.95 and $79.05

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