Question

you establish a straddle on walmart using september call and put options with a strike price of $88. the call premium is $7.40 and the put premium is $8.15. required: a. what is the most you can lose on this position? (input the amount as positive value. round your answer to 2 decimal places.) b. what will be your profit or loss if walmart is selling for $94 in september? (input the amount as positive value. round your answer to 2 decimal places.) c-1. what is the break-even price for lower bound? (round your answer to 2 decimal places.) c-2. what is the break-even price for upper bound? (round your answer to 2 decimal places.)

Answer 1

a. The most you can lose on this straddle position is $15.55. b. If Walmart is selling for $94 in September, your profit or loss will depend on the strike price and the premiums paid. c-1. The break-even price for the lower bound is $80.60. c-2. The break-even price for the upper bound is $96.15.

Step-by-step explanation:

a. The most you can lose on this position is the total premium you paid for both the call and put options. In this case, the call premium is $7.40 and the put premium is $8.15, so the total premium is $7.40 + $8.15 = $15.55.

b. To calculate the profit or loss, you need to compare the strike price to the selling price. In this case, the strike price is $88 and the selling price is $94. For the call option, the profit or loss would be $94 - $88 - $7.40 (call premium). For the put option, the profit or loss would be $88 - $94 - $8.15 (put premium). You take the positive value of both calculations and add them together to determine the overall profit or loss.

c-1. The break-even price for the lower bound is the strike price minus the call premium. In this case, the break-even price would be $88 - $7.40 = $80.60.

c-2. The break-even price for the upper bound is the strike price plus the put premium. In this case, the break-even price would be $88 + $8.15 = $96.15.

Answer 2

In a straddle position on Walmart, using September options with a strike price of $88, the maximum loss is the sum of premiums, $1,555. At $94 stock price in September, the loss would be $955. The break-even prices are $72.45 (lower bound) and $103.55 (upper bound).

Step-by-step explanation:

Straddle Position on Walmart Stock

When establishing a straddle position on Walmart using options, two scenarios can occur. One involves the maximum possible loss, and the other involves calculating the profit or loss at a specific stock price at expiration. Furthermore, determining the break-even points for the strategy is key.

Maximum Possible Loss

The most you can lose on this straddle option position is the total amount it cost to enter the trade, which is the sum of both the call and put premiums. Since the call premium is $7.40 and the put premium is $8.15, the total cost (and therefore the maximum loss) is:

Total maximum loss = Call premium + Put premium = $7.40 + $8.15 = $15.55 per share, or $1,555 for one contract representing 100 shares.

Profit/Loss at $94 Stock Price

If Walmart's stock price is $94 at expiration, the put option will expire worthless, and the call option will have an intrinsic value of $6 ($94 stock price - $88 strike price). Since the call premium was $7.40, we incur a loss on the call. The total loss on the position would be the total premium paid minus the value of the call:

Loss = Total premium paid - Intrinsic value of call = $15.55 - $6 = $9.55 per share, or $955 for one contract.

Break-Even Prices

The break-even prices for the straddle are calculated by adding and subtracting the total premium to and from the strike price:

Lower bound break-even price = Strike price - Total premium paid = $88 - $15.55 = $72.45

Upper bound break-even price = Strike price + Total premium paid = $88 + $15.55 = $103.55