Recently you sold a call and a put option on a stock with a common exercise pric

Question

Recently you sold a call and a put option on a stock with a common exercise price of $75.

The call premium was $5 and the put premium was $3.

Ignoring interest, you make money from this position if the stock price is:

greater than $75 but less than $78

greater than $67 or less than $83

less than $75 but greater than $72

less than $80 or greater than $72

less than $80 but greater than $75

A.

greater than $75 but less than $78

B.

greater than $67 or less than $83

C.

less than $75 but greater than $72

D.

less than $80 or greater than $72

E.

less than $80 but greater than $75

Explanation / Answer

The concerned scenario is that of a short straddle, where both call and put options are sold at the same time.

The maximum profit is the amount of premiumcollected by writing the options.

Call Put Total greater than $75 but less than $78 $ -70 ($75- $5) $ 3 $ -67 greater than $67 or less than $83 $ 5 $ 3 $ 8 less than $75 but greater than $72 $ 5 $ -72 ($75- $3) $ -67 less than $80 or greater than $72 $ 75 $ -72 ($75- $3) $ 3 less than $80 but greater than $75 $ -70 ($75- $5) $ 3 $ -67

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