Question

A customer buys 5 ABC Jan 30 Straddles for a total premium of $3,500. Just prior to expiration ABC stock closes at $21, and the customer closes the options positions at intrinsic value.
The customer will have a:

A. $1,000 gain
B. $1,000 loss
C. $3,500 gain
D. $3,500 loss

Answer 1

Answer:

A) $1,000 gain

Explanation:

When a client buys a straddle, he is purchasing a call and a put option on the same stock with the same strike price and expiration date.

this client bought 5 ABC Jan 30 calls  and 5 ABC Jan 30 puts:

each contract was worth $700 (= $3,500 / 5 contracts)

If the price of the stock fall below $30, the call option will not be taken, but the put option will be enforced. Since the value of the stock is $21, this means that the put option resulted in a $900 profit (= ($30 - $21) x 100).

The client paid $700 for each option, therefore his profit per option = $900 - $700 = $200

His total profit = $200 x 5 options = $1,000