FRM Part I · FRM Exam Part I · Properties of Options
An investor buys a call and a put on the same asset, both with strike 100 and the same expiry, paying 5 for the call and 4 for the put. If the asset price at expiration is 112, what is the net profit of the position?
The net profit is 3. The straddle costs 9 in total premiums. At 112 the call pays 12 and the put pays nothing, so profit is 12 minus 9. Subtracting only the call premium would wrongly give 7, because the put premium is also a cost.
- A3Correct
- B7
- C12
- D-9
Explanation
A long straddle costs 5 + 4 = 9. At 112 the call pays 12 and the put expires worthless. Net profit is 12 - 9 = 3. Answer 7 subtracts only the call premium and ignores the put premium; the breakevens are 91 and 109.
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