Options

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Options

Postby suresh.wadhwani2009 » Mon Apr 30, 2012 4:05 pm

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:
Choose one answer.
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

Postby content.pristine » Wed May 02, 2012 1:52 pm

Hi Suresh,

The answer is correct at $43 to $57
Here is a link to the excel with its payoffs: http://c719308.r8.cf2.rackcdn.com/Straddle.xlsx
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.. 8-)

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Re: Options

Postby suresh.wadhwani2009 » Wed May 02, 2012 2:43 pm

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

Postby content.pristine » Wed May 02, 2012 5:47 pm

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

.. 8-)

suresh.wadhwani2009
Finance Junkie
Posts: 99
Joined: Sat Apr 07, 2012 10:24 am

Re: Options

Postby suresh.wadhwani2009 » Wed May 02, 2012 8:15 pm

Exactly:)

Thanks!!


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