Put and call options are available on euros () with the following information: C
ID: 2614320 • Letter: P
Question
Put and call options are available on euros () with the following information: Call option premium on euro-$.02 per unit Put option premium on euro-$.015 per unit Call option strike price $1.12 Put option strike price - $1.10 One option contract represents 62,500. per unit. The maximum loss occurs at future spot The maximum loss for the long strangle position is $ prices O a, 0.015; between the two exercise prices b.0.035; between the two exercise prices O c. 0.035; above the call option strike price d. 0.02; between the two exercise prices e. 0.035; below the put option strike price OExplanation / Answer
The long strangle position is a neutral strategy. It involves the simultaneous purchase of call and put option of the same underlying asset. Both call and put are bought at slightly out-of-the-money strike purchase. The call option will incur loss when stock price is below $1.14 ($1.12 + $0.02) and put option will incur loss when the price of the stock is above $1.115.
The formula for maximum loss on a long strangle position is
Maximum Loss = Net premium paid + Commissions paid
Maximum Loss = $0.02 + $0.015 + No Commission
Maximum Loss = $0.035
This loss occurs between the exervise price of long call and long put and hence will occur between $1.10 and $1.12. Hence the answer is B.
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