CMA Final · Strategic Financial Management · Options
A trader buys a call with strike Rs 100 for Rs 6 and a put with strike Rs 100 for Rs 4 on the same stock and expiry (long straddle). At what expiry prices does the trader break even?
The break-evens are Rs 90 and Rs 110. A long straddle costs Rs 10 in total premium, so the price must move Rs 10 above or below the Rs 100 strike for the trader to recover the cost.
- ARs 90 and Rs 110Correct
- BRs 94 and Rs 106
- CRs 96 and Rs 104
- DRs 100 only
Explanation
Total premium = 6 + 4 = Rs 10. Break-even points are strike plus and minus total premium: 100 + 10 = 110 and 100 - 10 = 90. Using only the call premium gives 94 and 106, which is wrong.
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