Question

Suppose you buy a straddle, which means you purchase a put and a call with the same strike price. The put price is $1.70 and the call price is $2.10. Assume the strike price is $60. What are the expiration date payoffs to this position for stock prices of $55, $57.50, $60, $62.50, and $65? What are the expiration date net profits to this position for these same stock prices? What are the break-even stock prices?

Answer 1

If the stock price is $55 :

Payoff on put option = $60 - $55 = $5

Payoff on call option = $0

Payoff of position = $5

Net profit of position =  Payoff of position - premium paid = $5 - $1.70 - $2.10 = $1.20

If the stock price is $57.50:

Payoff on put option = $57.50 - $55 = $2.50

Payoff on call option = $0

Payoff of position = $2.50

Net profit of position =  Payoff of position - premium paid = $2.50 - $1.70 - $2.10 = -$1.30

If the stock price is $60:

Payoff on put option = $0

Payoff on call option = $0

Payoff of position = $0

Net profit of position =  Payoff of position - premium paid = $0 - $1.70 - $2.10 = -$3.80

If the stock price is $62.50:

Payoff on put option = $0

Payoff on call option = $62.50 - $60 = $2.50

Payoff of position = $2.50

Net profit of position =  Payoff of position - premium paid = $2.50 - $1.70 - $2.10 = -$1.30

If the stock price is $65:

Payoff on put option = $0

Payoff on call option = $65 - $60 = $5

Payoff of position = $5

Net profit of position =  Payoff of position - premium paid = $5 - $1.70 - $2.10 = $1.20

Breakeven stock prices = strike price +/- premium paid

Breakeven stock prices = $60 +/- ($1.70 + $2.10)

Breakeven stock prices = $60 +/- $3.80

Breakeven stock prices = $56.20 and $63.80