FRM Part I · FRM Exam Part I · Introduction to Derivatives
A European call and a European put on the same stock both have a strike of $80. The call premium is $5 and the put premium is $7. An investor buys both (a long straddle). Ignoring discounting, for which range of expiry stock prices does the investor make a net profit?
The straddle is profitable when the stock ends below $68 or above $92. The total premium paid is $12, so the stock must move more than $12 away from the $80 strike in either direction to recover the cost.
- ABetween $68 and $92
- BBelow $68 or above $92Correct
- CBelow $73 or above $87
- DAbove $80 only
Explanation
Total premium paid = 5 + 7 = $12. Profit requires |S - 80| > 12, so S < 68 or S > 92. Option 'between 68 and 92' is the loss region; 73 and 87 use only the call premium of 5... actually 7 and 5 individually, which is wrong.
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