Series 7 practice questionhardOptions — Strangle Calculation
An investor buys 1 XYZ Nov 45 put at $2 and buys 1 XYZ Nov 55 call at $3 (long strangle). At expiration, XYZ is at $61. What is the profit or loss?
- AProfit of $100✓ Correct answer
- BProfit of $600
- CProfit of $300
- DLoss of $500
Explanation
Why A — Profit of $100
Total premium paid = $2 + $3 = $5. The put expires worthless. The call is worth $6 ($61 - $55). Profit = call value - total premium = $6 - $5 = $1 per share, or $100. The upper breakeven was $60 ($55 + $5), and the stock at $61 is just above it, yielding a small profit.
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