Question

A 1-week European call option on the Apple stock is trading at $4. A 1-week European put option with the same strike price is trading at $3.5. An investor longs a straddle using these two options. What is the maximum loss for this investor at the option maturity? Please provide your answer in unit of dollars without the dollar sign.

Answer 1

	LONG STRADDLE STRATEGY	Cost
	1. BUY CALL at Strike Price X	$4
	2. BUY PUT at Strike Price X	$3.50
	Total Cost	$7.50
	Assume X=$100
	Price at Expiration =S
	Payoff for Long (Buy) CALL:
	Payoff =Max.((S-100),0)
	Payoff for Long (Buy) PUT:
	Payoff =Max.((100-S),0)
	S	A	B	C=A+B-7.5
	Price at Expiration	Payoff Long CALL	Payoff Long PUT	Net Profit
	90	0	10	2.5
	91	0	9	1.5
	92	0	8	0.5
	93	0	7	-0.5
	94	0	6	-1.5
	95	0	5	-2.5
	96	0	4	-3.5
	97	0	3	-4.5
	98	0	2	-5.5
	99	0	1	-6.5
	100	0	0	-7.5
	101	1	0	-6.5
	102	2	0	-5.5
	103	3	0	-4.5
	104	4	0	-3.5
	105	5	0	-2.5
	106	6	0	-1.5
	107	7	0	-0.5
	108	8	0	0.5
	109	9	0	1.5
	110	10	0	2.5
	MAXIMUM LOSS TO THE INVESTOR	7.50	dollars