9) You establish a straddle on Walmart using September call and put options with
ID: 2721780 • Letter: 9
Question
9) You establish a straddle on Walmart using September call and put options with a strike price of $63. The call premium is $4.90 and the put premium is $5.65.
What is the most you can lose on this position? (Input the amount as positive value. Round your answer to 2 decimal places.)
What will be your profit or loss if Walmart is selling for $70 in September? (Input the amount as positive value. Round your answer to 2 decimal places.)
At what stock prices will you break even on the straddle? (Input your answers from highest to lowest to receive credit for your answers. Round your answers to 2 decimal places.)
a.What is the most you can lose on this position? (Input the amount as positive value. Round your answer to 2 decimal places.)
Explanation / Answer
Answer a
Maximum loss happens when the stock price is the same to the strike price upon expiration. Both the call and the put expire worthless, and the investor’s outlay for the purchase of both options is lost:
=> 4.90 + 5.65
Maximum loss => $10.55
Answer b
Loss=> Final value – Original investment
=> 7 - 10.55
Loss => $3.55
Answer c
There are two break even prices
1. ST>X
(STX)(C+P) = (ST63)$10.55 = $0
=> 73.55
2. ST<X
(XST)(C+P) = (63ST)$10.55 = $0
=> 52.45
Breakeven prices => $73.55 or 52.45
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