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 only if the share price is ________ in August.

Question

Quizplus · Accepted Answer

Selling a call and a put with the same strike price of $50 is known as a short straddle. The maximum profit for this strategy is the total premium received, which is $5.75 ($1.25 call premium + $4.50 put premium). The breakeven point for this strategy is calculated by adding and subtracting the total premium from the strike price. In this case, the breakeven point is $44.25 (50 - 5.75) and $55.75 (50 + 5.75). Therefore, the strategy will pay off if the share price is between these two points, which is answer B.

You Sell One Hewlett Packard August 50 Call Contract and Sell