FRM Part I · FRM Exam Part I · Options Markets
A trader buys a put with strike $50 and a call with strike $60 on the same stock, same expiry, paying a total premium of $4. What is the strategy and its breakeven prices at expiration?
It is a long strangle with breakevens of $46 and $64. The put and call have different strikes, unlike a straddle. The $4 premium is subtracted from the put strike and added to the call strike to get the breakevens.
- AStrangle; breakevens $46 and $64Correct
- BStraddle; breakevens $46 and $64
- CStrangle; breakevens $50 and $60
- DStrangle; breakevens $44 and $66
Explanation
Different strikes with a put and a call, both long, form a strangle. Downside breakeven = 50 - 4 = $46; upside breakeven = 60 + 4 = $64. A straddle requires equal strikes.
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