Question

XYZ CORP
		Exercise		NYSE
	Date	Price	Price	Close
Calls	OCT	85	16 3/4	101 11/16
	OCT	90	12	101 11/16
	OCT	95	7 5/8	101 11/16
Puts	OCT	85	1/8	101 11/16
	OCT	90	3/8	101 11/16
	OCT	95	13/16	101 11/16

If you establish a long straddle using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

If you establish a long strap using the options with an 85 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

If you establish a long strip using the options with a 90 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

If you establish a long straddle using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

Refer to Exhibit 22.2. If you establish a long strap using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

Answer 1

(1) Computation of the doller gain or loss in a long straddle position. We have,

Long Straddle = Purchase one Oct 85 put and one Oct 85 call

Total cost incurred in a long straddle

Cost of one call = 67/4 x 100 = $ 1,675

Cost of one put = 1/8 x 100 = $ 12.50

Total cost incurred in a long straddle position for 85 exercise price = 1,675 + 12.50 = $ 1,687.50

Payoff of one call = 100 ( 101.69 - 85 ) = $ 1,668.75

Payoff of one pur = 0 ( It is expires because out of the money)

Doller gain or loss = 1,668.75 - 1,687.50 = - $ 18.75

Hence, the net loss in the long staddle position with exercise price 85 is - $ 18.75

(2) Computation of the doller gain or loss in a long strap position with exercise price 85.We have,

Long strap = Purchase 2 OCT 85 call and 1 OCT 85 put

Cost of 2 call = 2 x 16.75 x 100 = $ 3,350

Cost of 1 put = 1 x 1/8 x 100 = $ 12.50

Total cost = 3,350 + 12.50 = $ 3,362.50

Payoff of 2 calls = 2 x 100 ( 101 11/16 - 85) = $ 3,375.50

Payoff of one pur = 0 ( It is expires because out of the money)

Doller gain or loss = 3,375.50 - 3,362.50 = $ 13.00

Hence, the net doller gain in strap position is $ 13.00

(3) Computation of the doller gain or loss in a long strip position with exercise price 90.We have,

Long strip position = purchase 1 call and 2 put

cost of one call = 12 x 100 = $ 1,200

Cost of 2 put = 2 x 3/8 x 100 = $ 75

Total cost = 1,200 + 75 = $ 1,275

Payoff of one call = 100 ( 101 11/16 - 90) = $ 1,168.75

Payoff of 2 put = 0  ( It is expires because out of the money)

Doller gain or loss = 1,168.75 - 1,275 = - $ 106.25

Hence, the net loss in the strip position is - $ 106.25

(4) Computation of the doller gain or loss in a long straddle position with exercise price 95.We have,

Long Straddle = Purchase one Oct 95 put and one Oct 95 call

Total cost incurred in a long straddle

Cost of one call = 61/8 x 100 = $ 762.50

Cost of one put = 13/16 x 100 = $ 81.25

Total cost incurred in a long straddle position for 95 exercise price = 762.50 + 81.25 = $ 843.75

Payoff of one call = 100 ( 101 11/16 - 95 ) = $ 668.75

Payoff of one pur = 0 ( It is expires because out of the money)

Doller gain or loss =668.75 - 843.75 = - $ 175

Hence, the net loss in the long staddle position with exercise price 85 is - $ 175

(5) Computation of the doller gain or loss in a long strap position with exercise price 95.We have,

Long strap = Purchase 2 OCT 95 call and 1 OCT 95 put

Cost of 2 call = 2 x 61/8 x 100 = $ 1,525

Cost of 1 put = 1 x 13/16 x 100 = $ 81.25

Total cost = 1,525 + 81.25 = $ 1,606.25

Payoff of 2 calls = 2 x 100 ( 101 11/16 - 95) = $ 1,337.50

Payoff of one pur = 0 ( It is expires because out of the money)

Doller gain or loss = 1,337.50 - 1,606.25 = - $ 268.75

Hence, the net doller loss in strap position is - $ 268.75