Options

Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Options

Pls explain
Source: Mock test IV- Afternoon Session

A call with a strike price of \$50 costs \$4. A put with the same strike price and expiration date costs \$3. The range of stock prices for which a straddle would lead to a loss is:
a. \$46 to \$54
b. \$43 to \$57
c. \$46 to \$53
d. \$47 to \$54

According to pristine ans is \$43 to \$57

According to me ans should be \$46 to \$54. As at \$43 and \$57 there is no profit no loss situation. SO ans can't be b

pls explain

Tags:

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Options

Hi Suresh,

The answer is correct at \$43 to \$57
Since the values are 0 at 43 and 57, the values in between 43 and 57 are negative as this is a straddle.

Hope this helps..

Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Re: Options

I know the values between 43 to 57 leads to loss. But at 43 and 57 payoff is 0 which should not be consider as loss. So how can the ans be 43 to 57?

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Options

You are right. The answer should say between but not 43 and 57

..

Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Exactly:)

Thanks!!