SIE practice questionhardOptions — Straddle
An investor buys 1 ABC 50 call at $3 and 1 ABC 50 put at $2 (same expiration). This is a long straddle. The investor profits when:
- AABC stock moves significantly in either direction beyond the breakeven points✓ Correct answer
- BABC stock falls below $50 only
- CABC stock rises above $50 only
- DABC stock stays at exactly $50
Explanation
Why A — ABC stock moves significantly in either direction beyond the breakeven points
A long straddle profits from large price movements in EITHER direction. Total premium paid = $3 + $2 = $5. Upper breakeven = $50 + $5 = $55; lower breakeven = $50 - $5 = $45. The stock must move beyond either breakeven point for the position to be profitable. Maximum loss = $5 total premium (if stock stays at exactly $50). Long straddles are used when expecting high volatility but uncertain about direction.
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