Question

Consider a short straddle constructed from options on 3M stock which have an expiration date of January 17, 2020. The following table displays the only possible prices of 3M stock on January 17, as well as the payoffs accruing to someone who holds a short straddle on the stock:

Stock price	$80	$90	$100	$110	$120
Gain from short straddle	-$10	$0	$10	$0	-$10

2a. A short straddle is created using two options. For each option in the short straddle above, indicate whether it is a put or a call, whether it is bought or sold, and what its strike price is. What is the maximum possible loss on this short straddle? What is the maximum possible loss on a real short straddle?

Explain your answer to all of the above questions.

2b. What is the sum of the premiums of the options you identified in part (a)? Explain.

2c. Why would someone enter into a short straddle? Explain carefully.

Answer 1

Ans. a . Short1 100 call at. 5

Short1 100 put at.   5

Stock price	Short 100 Call Profit/(Loss)	Short 100 Put Profit/(Loss)	TOTAL GAIN
$80	+5	-15	-10
$90	+5	-5	0
$100	+5	+5	+10
$110	-5	+5	0
$120	-15	+5	-10

b)sum of the premiums

Short1 100 call at 5

Short1 100 put at 5

Total premium 10

C) Short straddle is for market with very low movement and allow traders to make profit through underlying stock as we can see from above example we are in profitable range from $90 to $110 which shows less volatility.