CMA Final · Strategic Financial Management · Options
A call option on a share has a strike price of ₹200 and a premium of ₹15. A put option on the same share with the same strike and expiry has a premium of ₹9. An investor buys one call and one put (a long straddle). What are the breakeven share prices at expiry?
The breakevens are ₹176 and ₹224. A long straddle costs ₹24 in total premium (15 plus 9), so the share must move more than ₹24 above or below the ₹200 strike for the investor to profit.
- A₹176 and ₹224Correct
- B₹185 and ₹215
- C₹191 and ₹209
- D₹200 only
Explanation
Total premium paid = 15 + 9 = ₹24. Upper breakeven = 200 + 24 = ₹224; lower breakeven = 200 - 24 = ₹176. Using only one premium would give ₹185/₹215 or ₹191/₹209, which is wrong.
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