Question

30. An investor constructs a long straddle by buying an April $30 call for $4 and buying an April put $30 for $3. If the price of the underlying shares is $27 at expiration, what is the profit on the position? a. -$4 b. -$2 c. $2 d. $3 31. Consider an option strategy where an investor buys one call option with an exercise price of $55 for $7, sells two call options with an exercise price of $60 for $4, and buys one call option with an exercise price of $65 for $2. If the stock price declines to $25, what will be the profit or loss on the strategy? b. Si c. $1

Answer 1

30. A long straddle profits when the price moves significantly in either direction.

The price has moved down. The total price of the straddle = 4 + 3 = $7

Profit of a long straddle = (Strike price - Price at expiry) - Price of the straddle

Profit = (30 - 27) - 7

Profit = -$4 (Option a)

31. The total price of this strategy = 7 - 4*2 + 2 = 1

This strategy loses money if the stock price ends below $55. The maximum loss is equal to the price paid for this strategy, which is $1.

The correct answer is option b. -$1

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