You sell one Hewlett Packard August 50 call contract and sell one Hewlett Packard August 50 put contract.The call premium is $1.25 and the put premium is $4.50.Your strategy will pay off __________ in August.

Question

Quizplus · Accepted Answer

Selling a call and a put at the same strike price is known as a short straddle. In this case, the strike price is $50. The premium received for selling the call and put is $1.25 + $4.50 = $5.75.

If the stock price at expiration is above $50, the call option will be exercised and the seller will have to sell the stock at $50. However, the put option will expire worthless, and the seller gets to keep the $5.75 premium.

If the stock price at expiration is below $50, the put option will be exercised and the seller will have to buy the stock at $50. However, the call option will expire worthless, and the seller gets to keep the $5.75 premium.

Therefore, the strategy will be profitable as long as the stock price stays within the range of $44.25 and $55.75, which is the strike price minus the premium received and the strike price plus the premium received, respectively. This is because the seller gets to keep the premium if the stock price stays within that range, which represents the maximum profit for this strategy.

You Sell One Hewlett Packard August 50 Call Contract and Sell