The XYZ stock pays no dividend and is currently selling for $50. The European XYZ 50 call is selling at $6 and XYZ 50 put is selling at $4. The options expire in 6 months. You simultaneously purchase the put and the call (this strategy is called a long straddle). Remember that each option contract represents 100 shares.

a) What is your maximum loss on the option expiration date? 

b) This strategy has two breakeven prices on the expiration date. What is the lowest breakeven price? 

c) If on the option expiration date the XYZ stock is $55. What is your profit/loss? 

d) Ignoring the transactions costs, what is the market risk-free interest rate? 

Answer rating: 100% (QA)

To calculate the outcomes of the long straddle strategy we need to consider the various scenarios and calculate the profitloss for each one a Maximum ... View the full answer