The current stock price of Alcoa is $68 and the stock does not pay dividends. Yo

Question

The current stock price of Alcoa is $68 and the stock does not pay dividends. You think in the near future there will be a dramatic movement in stock price depends on the result of a test for new drug. However the direction of the price movement is not clear, so you decide to establish a straddle strategy using at the money options with 1 month to expiration to take advantage of it. Both put and call at the money options have a premium of $5. 1 Month later, the test is postponed, as a result the stock price drops to $65. What is your profit or loss using your strategy?

A. 700 profit

B. 700 loss

C. 300 loss

D. 300 profit

E. 1000 loss

F. 1000 profit

Explanation / Answer

In this Straddle strategy, either direct of the stock the strategy holder will gain. In the present case,. Price drops to $65 from $68 making a $3 change. Now, Cost of both call and put are $10. Therefore, the difference is $7 ($10-$3) multiplied by 100 units (say) resulting in $700 profit.

Therefore, option A is correct with a profit of $700.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.