You establish a straddle on Walmart using September call and put options with a
ID: 2620763 • Letter: Y
Question
You establish a straddle on Walmart using September call and put options with a strike price of $63. The call premium is $4.90 and the put premium is $5.65.
. 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 Walmart is selling for $70 in September? (Input the amount as positive value. Round your answer to 2 decimal places.)
(Click to select)ProfitLoss of $
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 $
Explanation / Answer
A straddle involves purchasing a call and put option simultaneously on the same asset with the equal time to maturity and strike price.
Strike Price = $ 63, Call Premium = $ 4.9 and Put Premium = $ 5.65
(a) The maximum possible loss is when the asset price is at $ 63, thereby making both options at-the-money. The maximum loss would be equal to the total premium paid which is (4.9 + 5.65) = $ 10.55
(b) If the Walmart price is $ 70, the call option is in the money and the put option is out of money. Therefore, profit made on call option (70 - 63) = $ 7
Net Profit = Option Profit - Total Premium = 7 - 10.55 = - $ 3.55 ( A negative sign implies a loss)
(c) Let the stock price be $ S
When stock price is below $ 63 the payoff is (63 - S) and when the stock price is above $ 63, the payoff is (S - 63)
Net Cash Flow, when S < $ 63 will be (63 - S) - 10.55 and when S > $ 63 will be (S - 63) - 10.55
Break Even Point 1 = (63 - S) - 10.55 = 0
S = $ 52.45
Break Even Point 2 = (S - 63) - 10.55 = 0
S = $ 73.55
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