You establish a straddle on walmart using september call and put options with a strike price of $99. the call premium is $7.95 and the put premium is $8.70. a) what is the most you can lose on this position?

b) what will be your profit or loss if walmart is selling for $58 in september?

c) at what stock prices will you break even on the straddle?

(a) Maximum loss will be $16.65

(b) There will be loss of $24.35

(c) Upper break even level = $115.65

Lower break even level = $82.35

Explanation:

We have given strike price = $99

Call premium = $7.95

And put premium = $8.70

(a) Maximum loss is given by

Maximum loss = put premium + call premium = $7.95 + $8.70 = $16.65

(b) Selling price = $58

So profit/loss = $58 - $99 + $16.65 = -$24.35 ( negative sign indicates loss )

So there will be a loss of $24.35

(c) Upper break even level = $99+$16.65 = $115.65

Lower break even level = $99 - $16.65 = $82.35