Question

Compute the upper and lower breakeven point for a strangle. The exercise price on the call option is $1.72, and the exercise price on the put option is $1.55. The premium on the put option is $0.014, and the premium on the call option is $0.01.

(a) Upper Breakeven: $1.72, Lower Breakeven: $1.55
(b) Upper Breakeven: $1.73, Lower Breakeven: $1.54
(c) Upper Breakeven: $1.74, Lower Breakeven: $1.53
(d) Upper Breakeven: $1.75, Lower Breakeven: $1.52

Answer 1

The upper breakeven point for a strangle is $1.73, and the lower breakeven point is $1.54. Correct option is b.

Step-by-step explanation:

To compute the upper and lower breakeven points for a strangle, we need to consider the exercise prices of the call and put options, as well as the premiums paid for each option.

The upper breakeven point is calculated by adding the exercise price of the call option to the premium paid for the call option, which gives us $1.72 + $0.01 = $1.73.

The lower breakeven point is calculated by subtracting the premium paid for the put option from the exercise price of the put option, which gives us $1.55 - $0.014 = $1.536.

Therefore, the correct answer is (b) Upper Breakeven: $1.73, Lower Breakeven: $1.54.