USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup

-Refer to Exhibit 16.4. Calculate the payoffs of a long strap at a stock price at expiration of $20 and a stock price at expiration of $45.
A) $6.35, $18.85
B) $29.65, $42.15
C) $21.65, $34.15
D) $8, $8
E) -$8, -$8

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
 
-Refer to Exhibit 16.4. Calculate the payoffs of a long strap at a stock price at expiration of $20 and a stock price at expiration of $45.
A) $6.35, $18.85 
B) $29.65, $42.15 
C) $21.65, $34.15 
D) $8, $8 
E) -$8, -$8

Quizplus · Accepted Answer

At a stock price of $20, the call options expire worthless, and the put option has an intrinsic value of $5 ($25 strike - $20 stock price). Since there are two long put positions, the total payoff from the puts is $10. After accounting for the initial cost of the strap ($3.65), the net payoff is $6.35. At a stock price of $45, both call options have an intrinsic value of $20 ($45 stock price - $25 strike), totaling $40 for the two calls. The put option expires worthless. After subtracting the initial cost of the strap ($21.15), the net payoff is $18.85.