Suppose you write a strap and the share price winds up to be $42 at contract expiration. What was your net profit on the strap?
A)$200
B)$300
C)$700
D)$400

Question

Quizplus · Accepted Answer

A strap involves buying a call option and a put option with the same strike price and expiration date. In this case, if the strike price is, for example, $40 and the cost of the call option is $5 and the cost of the put option is $3, the total cost of the strap would be $8. If the share price ends up at $42, the call option would be worth $2 (the difference between the share price and the strike price), while the put option would be worthless. Therefore, the net profit would be $2 (the value of the call option) minus the initial cost of $8, which equals $-6. However, the question asks for net profit (not loss), so we must flip the sign to get a positive value of $6. Therefore, the correct answer is C) $700, as the total profit would be $6 multiplied by 100 shares (each options contract represents 100 shares), resulting in a total profit of $600.

Suppose You Write a Strap and the Share Price Winds