Question

Suppose you purchase one March 110 call contract at $2.63 and one put March 110 put contract at $12.99. (4’) A) If at expiration, the price of the stock is $115, what would your profit/loss be? B) For the straddle strategy above, what is the stock price at which you can break-even?

Answer 1

For the given options strategy, the profit/loss at expiration with a stock price of $115 would be -$15.62. The break-even stock price for the strategy is $125.62.

Step-by-step explanation:

To calculate the profit/loss for the options strategy, we need to consider the cost of the call and put contracts, as well as the final stock price. A) For the call contract, the profit/loss can be calculated as follows: Profit/loss = (stock price at expiration - strike price) - premium paid = ($115 - $110) - $2.63 = $2.37. Since you purchased one call contract, the total profit/loss would be $2.37. For the put contract, the profit/loss can be calculated as follows: Profit/loss = (strike price - stock price at expiration) - premium paid = ($110 - $115) - $12.99 = -$17.99. Since you purchased one put contract, the total profit/loss would be -$17.99. To calculate the overall profit/loss, we add the profit/loss from the call and put contracts: Overall profit/loss = call profit/loss + put profit/loss = $2.37 + -$17.99 = -$15.62. Therefore, the overall profit/loss would be -$15.62.

B) To calculate the break-even stock price, we need to consider the total cost of the options strategy. The total cost can be calculated as follows: Total cost = call contract cost + put contract cost = 1 x $2.63 + 1 x $12.99 = $15.62. To break even, the stock price needs to cover the total cost of the options strategy. Therefore, the break-even stock price would be $110 + $15.62 = $125.62.