Series 7 practice questionhardOptions — Long Straddle Calculation
An investor buys 1 ABC Nov 60 call at $5 and buys 1 ABC Nov 60 put at $4 (long straddle). At expiration, ABC is at $72. What is the investor's profit or loss?
- AProfit of $300✓ Correct answer
- BProfit of $1,200
- CProfit of $700
- DLoss of $300
Explanation
Why A — Profit of $300
Total premium paid = $5 + $4 = $9. The call is worth $12 ($72 - $60). The put expires worthless. Profit = call value - total premium = $12 - $9 = $3 per share, or $300. The upper breakeven was $69 ($60 + $9), and since the stock is at $72, the position is profitable by $3 per share.
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