Question

You establish a straddle on Fincorp using September call and put options with a strike price of $80. The call premium is $7.00 and the put premium is $8.50. 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 b. What will be your profit or loss if Fincorp is selling for $88 in September? (Input the amount as positive value. Round your answer to 2 decimal places.) 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

Answer 1

a. The most that we can lose is computed as shown below:

= Call premium + Put premium

= $ 7 + $ 8.5

= $ 15.5

b. Profit or loss if fincorp is selling for $ 88 is as follows:

= ( Selling price - strike price - call premium ) - put premium

= ( $ 88 - $ 80 - $ 7 ) - $ 8.50

= $ 7.50

c. Break even price are computed as follows:

Highest break even price will be as follows:

= Strike price + call premium + put premium

= $ 80 + $ 7 + $ 8.50

= $ 95.50

Lowest break even price will be as follows:

= Strike price - call premium - put premium

= $ 80 - $ 7 - $ 8.50

= $ 64.50

So the break even prices will be:

= $ 95.50 and $ 64.50

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