Series 7 practice questionmediumOptions — Long Straddle
An investor buys 1 PQR Aug 50 call at $4 and buys 1 PQR Aug 50 put at $3 (long straddle). What are the breakeven points?
- A$43 and $57✓ Correct answer
- B$46 and $54
- C$47 and $53
- D$44 and $56
Explanation
Why A — $43 and $57
A long straddle has two breakeven points. The total premium is $4 + $3 = $7. Upper breakeven = strike + total premium = $50 + $7 = $57. Lower breakeven = strike - total premium = $50 - $7 = $43. The investor profits if the stock moves more than $7 in either direction from the strike price.
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