You establish a straddle on Walmart using September call and

You establish a straddle on Walmart using September call and put options with a strike price of $66. The call premium is $5.05 and the put premium is $5.80. a. What is the most you can lose on this position? (Input the amount as positive value. Round your answer to 2 decimal places.) Maximum loss b. What will be your profit or loss if Walmart is selling for $73 in September? (Input the amount as positive value. Round your answer to 2 decimal places.) (Click to select) of $ c. 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.) Break even pricesand S

Solution

All the questions are solved based on the assumption that its long straddle

a). The maximum possible loss = premium paid = 5.05+5.80

   = 10.85

b) Stock price is 73. So we will excercise call option and will lapse put option

   Profit = 73-66 = 7

Less: Premium paid = 10.85

Net profit = -3.85 (Loss of 3.85)

c. Break even is the situation where no profit and loss.

   So the breakeven is 66+10.85 = 76.85

and    = 66-10.85 = 55.15

   If the stock price is 55.15 we will lapse the call option and will excercise the put option.

3. Exercise price = 55

   Call premium = 6

The investor will exercise the call option is the strock price is above 55.

So the break even is = Exercise price+premium

= 55+6

= 61

if the stock price is 61 the investor will exercise the option call and his net profit = 61-55 -6 = 0