Assume it is June, 2010 and you are awaiting clarity on BP Assume it is June, 20

Question

Assume it is June, 2010 and you are awaiting clarity on BP

Assume it is June, 2010 and you are awaiting clarity on BP as fundamentals. As an investor, you are looking at options scenarios given the unpredictable oil spill crisis and associated firm specific risk (unsystematic risk). BP as closing price on June 8, 2010 was 34.67. Using the option prices shown below for the underlying security (BP), do the following: 5.) Create a straddle by buying the October 35 call and the October 35 put. What's the maximum loss for this position and what stock price will produce it? Where will you break even? Why would an investor establish a position like this?

Explanation / Answer

BP Stock Purchase Price           =          $ 34.67

Call option October Strike 35 rate        =          4.35

Put option October Strike 35 rate        =          5.25

Contract Size                            =          100 share

Maximum loss for this position and what stock price will produce it

In case of Straddle, Maximum loss occur when stock closes at the rate of strike price, in this case its $35.

Call

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