CMA Final · Strategic Financial Management · Options
Shares of Godavari Pharma trade at Rs 800. A trader buys one call with strike Rs 800 for Rs 40 and one put with strike Rs 800 for Rs 30, same expiry (long straddle). What are the break-even prices at expiry?
The break-even prices are Rs 730 and Rs 870. The straddle costs Rs 70 in total premium (40 plus 30), so the share must move 70 above or below the Rs 800 strike for the position to recover its cost.
- ARs 730 and Rs 870Correct
- BRs 760 and Rs 840
- CRs 770 and Rs 830
- DRs 800 only
Explanation
Total premium = 40 + 30 = Rs 70. Upper break-even = 800 + 70 = 870; lower = 800 - 70 = 730. Using only the call premium gives 760/840, which ignores the put premium.
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