FRM Part I · FRM Exam Part I · Options Markets
An investor buys a European put with strike $60 for $4 and buys a European call on the same asset with strike $60 for $5 (same expiry). Ignoring discounting, for which expiry asset prices does the position make a net profit?
The position profits when the asset price is below $51 or above $69. It is a long straddle costing $9 in total premium, so the price must move more than $9 from the $60 strike in either direction. Within that range the investor has a net loss.
- ABelow $51 or above $69Correct
- BBetween $51 and $69
- CAbove $69 only
- DBelow $55 or above $65
Explanation
This is a long straddle with total premium $9. Profit on the upside requires S - 60 > 9, so S > 69. Profit on the downside requires 60 - S > 9, so S < 51. Between 51 and 69 the position loses money. The $55/$65 option uses only one premium.
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