USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

-Refer to Exhibit 16.8. If you establish a long straddle using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A) $668.75 gain
B) $668.75 loss
C) $94.56 gain
D) $94.56 loss
E) $81.25 loss

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 16.8. If you establish a long straddle using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?
A) $668.75 gain 
B) $668.75 loss 
C) $94.56 gain 
D) $94.56 loss 
E) $81.25 loss

Quizplus · Accepted Answer

A long straddle involves buying a call and a put option with the same exercise price and expiration date. In this case, we buy the 95 call and put options. The cost of the options is the sum of their premiums, which is $6.4375 + $2.125 = $8.5625 per share. Since each option contract represents 100 shares, the total cost of the straddle is $856.25.

If XYZ is trading at 101 11/16 at expiration, the call option will be worth $6.5625 per share (101 11/16 - 95) and the put option will be worthless. The total value of the options is therefore $656.25. We subtract the cost of the straddle to get the dollar gain or loss: 
$656.25 - $856.25 = -$200.

So the dollar loss is $200, which is equivalent to $94.56 (rounded to two decimal places) per share. Therefore, the option holder would experience a loss of $94.56.