Question

Check my work You establish a straddle on Walmart using September call and put options with a strike price of $89. The call premium is $7.45 and the put premium is $8.20. a. What is the most you can lose on this position? (Input the amount as positive value. Round your answer to 2 decimal places.) points Maximum loss Skipped eBook Print References b. What will be your profit or loss if Walmart is selling for $96 in September? (Input the amount as positive value. Round your answer to 2 decimal places.) of

Answer 1

Straddle is a position consisting of call options and put options of the same strike price. The initial cost will be the total of premium paid for both options.

Straddle has a limited risk of the initial cost of premium paid but has unlimited profit potentiality.

Max loss is when the spot price is at the same strike price where the options were bought on the date of expiry. The options will expire worthless and maximum loss will be the initial cost

In the given case of wallmart.

Spot price= $89

Call premium=.$7.45

Put premium=$8.2

Maximum loss =Initial cost=$7.45+$8.2=$15.65

If the wallmart is selling at $96 then the profit/Loss will be as follows:

put option will be worthless and is 0

Call option will have value of $7 ($96-$89)

Loss=Initial cost-premium on expiry

=$15.65-$7 = $8.65

Breakwven will be when the call option reaches spot price plus the initial cost or spot minus initial cost

i.e., Call option =$15.65+$89= $104.65

Put option=$89-$15.65= $73.35