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Strike Premium
Call
Put -$
Stock price
You establish a straddle on Walmart using September call and put
options with a strike price of $80. The call premium is $7.00 and the put
premium is $8.50.
a. What is the most you can lose on this position?
b. What will be your profit or loss if Walmart is selling for $88 in
September?
c. At what stock prices will you break even on the straddle?
Shares of stock
Current stock price
Jan X Call price
Jan Call strike price
Jan X Put price
Jan Put strike price
Solution
a. Stock price
Call value $0
Put value $0
Imagine that you are holding 5,000 shares of stock, currently selling at $40
per share. You are ready to sell the shares but would prefer to put off the
sale until next year due to tax reasons. If you continue to hold the shares
until January, however, you face the risk that the stock will drop in value
before year-end. You decide to use a collar to limit downside risk without
laying out a good deal of additional funds. January call options with a strike
price of $45 are selling at $2, and January puts with a strike price of $35
are selling at $3. What will be the value of your portfolio in January (net of
the proceeds from the options) if the stock price ends up at (a) $30? (b) $40?
(c) $50? Compare these proceeds to what you would realize if you simply
continued to hold the shares.
Call strike price
Put strike price -$
Net outlay
Solution
You buy a share of stock, write a one-year call option with X = $10, and
buy a one-year put option with X = $10. Your net outlay to establish the
entire portfolio is $9.50. What must be the risk-free interest rate? The
stock pays no dividends.
