FRM Part I · FRM Exam Part I · Options Markets
A trader buys a 3-month call with strike $40 for $3 and buys a 3-month put with the same strike and expiry for $2. What is the range of terminal stock prices at which the straddle produces a loss?
The straddle loses money when the stock finishes between $35 and $45. The combined premium is $5, so breakevens are the $40 strike minus and plus $5. Outside that range, the gain on one option exceeds the total premium paid.
- ABetween $35 and $45Correct
- BBelow $35 or above $45
- CBetween $37 and $43
- DAbove $45 only
Explanation
Total cost is $5. Breakeven points are 40 - 5 = $35 and 40 + 5 = $45. The long straddle loses money when the final price lies between them. Option 'below 35 or above 45' describes the profitable region.
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