You establish a straddle on Walmart using September call and purt options with a
ID: 1171433 • Letter: Y
Question
You establish a straddle on Walmart using September call and purt options with a strike price of $58. The cal premium is $4 65 and the put premium is $5.40 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 Walmart is selling for $65 in September? (input the amount as positive value. Round your answer to 2 decimal places.) Cick to selec . At what stock prices will you break even on the straddle? (input your answers trom highest to lowest to receive credit for your answers. Round your answers to 2 decimal places Break even prices andExplanation / Answer
a) When the strike price is equal to the actual price, a straddle strategy gives worst payoff and the maximum loss in this case is equal to premium paid to purchase both the call and put option:
= 4.65 (call premium) + 5.40 (put premium) = $10.05
b) If the Walmart is selling for $65, it means the stock price exceeds the strike price. I that case investor will exercise the call option (i.e. investor will buy the stock at strike price $58 and will sell the same in market at actual price $65.
Payoff = Actual Price – Strike Price – Net Premium Paid
= 65 - 58 – (4.65 + 5.40)
= (3.05) loss
c) There are two breakeven points in a straddle strategy.
One is upper break-even point which is equal to strike price plus total premium cost:
= 50 + 10.05 = $60.05
(In this case investor will exercise his call option and payoff from call option offset the straddle cost)
Second is lower break-even point that is equal to the strike price minus total premium paid.
= 50 – 10.05 = $39.95
(In this case investor will exercise his put option and the payoff from put option will offset the cost of the straddle)
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