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6 December, 12:53

A customer buys 5 ABC Jan 30 Straddles for a total premium of $3,500. Just prior to expiration ABC stock closes at $21, and the customer closes the options positions at intrinsic value.

The customer will have a:

A. $1,000 gain

B. $1,000 loss

C. $3,500 gain

D. $3,500 loss

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Answers (1)
  1. 6 December, 13:11
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    A) $1,000 gain

    Explanation:

    When a client buys a straddle, he is purchasing a call and a put option on the same stock with the same strike price and expiration date.

    this client bought 5 ABC Jan 30 calls and 5 ABC Jan 30 puts:

    each contract was worth $700 ( = $3,500 / 5 contracts)

    If the price of the stock fall below $30, the call option will not be taken, but the put option will be enforced. Since the value of the stock is $21, this means that the put option resulted in a $900 profit ( = ($30 - $21) x 100).

    The client paid $700 for each option, therefore his profit per option = $900 - $700 = $200

    His total profit = $200 x 5 options = $1,000
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