FRM Part I · FRM Exam Part I · Properties of Options
A trader buys a European call with strike $60 for $5 and buys a European put with the same strike and expiry for $3 (a long straddle). Ignoring discounting, which pair of stock prices at expiration represents the break-even points?
The break-even prices are $52 and $68. The straddle costs $5 plus $3, or $8 in total, so the stock must finish $8 above or below the $60 strike to recover the cost. Using one premium alone understates the required move.
- A$52 and $68Correct
- B$55 and $63
- C$57 and $63
- D$60 and $68
Explanation
Total premium paid is $8. The position breaks even when the stock moves $8 away from the strike: 60 + 8 = $68 on the upside and 60 - 8 = $52 on the downside. Options using only the call or put premium alone ignore the combined cost.
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