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

Question

You establish a straddle on Walmart using September call and put options with a strike price of $47. The call premium is $4.75 and the put premium is $4.00.

a. What is the payoff on this position if Walmart is selling for $47 in September?

$

b. What will be your payoff if Walmart is selling for $35.25 in September?

$

c. What will be your payoff if Walmart is selling for $47.05 in September?

$

d. What is the cost of this investment strategy?

$

e. What will be your percent return if Walmart is selling $47 in September?

   percent

Explanation / Answer

Straddle = Long Put and Long Call

C = 4.75, P = 4

X = 47

a)

S = 47

Put = Max(0, 47-47) - 4 = -4

Call = Max(0, 47-47) -4.75 = -4.75

Payoff = -4-4.75 = -8.75

b)

S = 35.25

Put = Max(0, 47-35.25) - 4 = 7.75

Call = Max(0, 35.25-47) -4.75 = -4.75

Payoff = 7.75-4.75 = 3

c)

S = 47.05

Put = Max(0, 47-47.05) - 4 = -4

Call = Max(0, 47.05-47) -4.75 = -4.7

Payoff = -4-4.7= -8.7

d)

cost = -4 -4.75 = -8.75

e)

return = -8.75/8.75 = -100.00%

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