Cali ezt omheducation.com/hm.tpx 3.33 points Inbx Problem 15-7 (my version) You

Question

Cali ezt omheducation.com/hm.tpx 3.33 points Inbx Problem 15-7 (my version) You establish a straddle on Walmart using September call and put options with a strike price of $35. The call premium is $5,75 and the put premium is $5.00. a. What is the payoff on this position if Walmart is selling for $35 in September? b. What will be your payoff if Walmart is selling for $26.25 in September? c. What will be your payof if Walmart is selling for $38.53 in September? 2.78 d. What is the cost of this investment strategy? S10.75 e. What will be your percent return if Walmart is selling $38.53 in September? -67.16 percent References irr Worksheet

Explanation / Answer

Straddle = Long Put and Long Call

C = 5.75, P = 5

X = 35

a)

S = 35

Put = Max(0, 35-35) - 5 = 0

Call = Max(0, 35-35) -5.75 = 0

Payoff = -5-5.75 = -10.75

b)

S = 26.25

Put = Max(0, 35-26.25) - 5 = 3.75

Call = Max(0, 26.25-35) -5.75 = -5.75

Payoff = 3.75-5.75 = -2

c)

S = 38.53

Put = Max(0, 35-38.53) - 5 = -5

Call = Max(0, 38.53-35) -5.75 = -2..2

Payoff = -2.2-5 = -7.2

d)

cost = -5 -5.75 = -10.75

e)

return = -7.2/10.75 = -66.98%

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