Question

E. None above The following information is used for Question 14-17; You want to establish a straddle on Apple. The available call premium is $5 and put premium is $6. Suppose X-S50 for both the call and the put. 14. What is the maximum profit of this strategy? A. $50 B. $39 C. SI1 D. Unlimited E. None above 15. What is the minimum payoff of this strategy?

Answer 1

Solution:-   For Maximum profit trader should go for long straddle:-
      
   Value of option   (Put Premium+ Call Premium )
   $ 11.00   ($6 + $5)

In case of long straddle the maximum profit would be “Unlimited”, let’s understand how
If the stock “X” in closed at $80 a share at the time of option expiry. In this situation, the $50 strike price call would be worth $30 (or the difference between the underlying price and the strike price) i.e. ($80-$50).
Because we paid premium of $5 to buy this call option, this shows a gain of ($30-$5) = $25. At the same time, the $50 strike price put won't be exercised by trader
Because we also paid premium of $6 to buy this put, this represents a loss of $6. As a result, this long straddle will have gained a total of ($30- ($5+$6) = $19 in value ($25 gain on the call minus $6 loss on the put), represents a ($19/$11)*100=172.73% gain.
So we can say that if the stock price goes up our gain will keep increasing.
So the answer is Option D. Unlimited