FRM Part I · FRM Exam Part I · Trading Strategies
A trader sells a straddle on a stock at a strike of $100, receiving a total premium of $9. Ignoring discounting, what is the trader's profit or loss if the stock is at $112 at expiry?
The short straddle loses $3. The call finishes $12 in the money, costing the seller $12, while the put expires worthless. The $9 premium received offsets part of this, leaving a net loss of $3.
- ALoss of $3Correct
- BLoss of $12
- CProfit of $3
- DProfit of $9
Explanation
At $112 the call is exercised for an intrinsic value of $12 and the put expires worthless. The seller collected $9, so the net result is 9 - 12 = -$3, a loss of $3. Ignoring the premium gives the $12 loss, which is wrong.
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