FRM Part I · FRM Exam Part I · Trading Strategies
A trader buys one call and one put on the same stock, both with strike $50 and the same expiry. The call costs $3.20 and the put costs $2.30. Ignoring discounting, at what two stock prices at expiry does the position break even?
The long straddle costs $5.50 in total premium, so it breaks even at $44.50 and $55.50, which are the strike of $50 less and plus that premium. The stock must move more than $5.50 either way for the position to profit.
- A$44.50 and $55.50Correct
- B$47.70 and $52.30
- C$46.80 and $53.20
- D$50.00 only
Explanation
Total premium paid = 3.20 + 2.30 = $5.50. A long straddle breaks even at strike minus premium = 44.50 and strike plus premium = 55.50. Using only the call premium (46.80/53.20) ignores the put cost.
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