A call with a strike price of $60 costs $6. A put with the same strike...

A call with a strike price of $60 costs $6. A put with the same strike price and expiration date costs $4. For each of the intervals defined by the strike price, show the profit functions associated with forming a straddle (long position), and its graphical representation. For what range of stock prices would the straddle lead to a loss?

Expert Solution

Long straddle

Long straddle premium = Call price + Put price

Long straddle premium = 6 + 4 = $10

Long call profit = max(St - X, 0) - call price

Long put profit = max(X - St, 0) - put price

Long straddle profit = long call profit + put call profit

The range of stock prices for which the long straddle would lead to a loss = Strike price - straddle premium and Strike price + straddle premium

Lower bound = 60 - 10 = $50

Upper bound = 60 + 10 = $70

Loss range = 50 to 70

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jeff jeffy answered 1 year ago

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