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FRM Part I · FRM Exam Part I · Properties of Options

A trader holds a portfolio of one long European call (strike $100, premium $6) and one long European put (strike $100, premium $4) on the same stock and expiry. Which statement about the position at expiration is correct?

The straddle profits if the stock ends below $90 or above $110. The total premium paid is $10, and the payoff is the absolute distance from the $100 strike, so the distance must exceed $10. The maximum loss is $10, not $6.

  1. AIt profits if the stock finishes below $90 or above $110Correct
  2. BIt profits only if the stock finishes between $90 and $110
  3. CIt profits if the stock finishes above $104 or below $96
  4. DIt has a maximum loss of $6

Explanation

This is a long straddle with total premium of $10. Payoff is |S - 100|, so profit requires |S - 100| > 10, meaning S below $90 or above $110. Maximum loss is the $10 premium, at S = $100. The range $90 to $110 is the zone of loss, and $96/$104 would apply to only a $4 premium.

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