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