Consider a short straddle constructed from options on 3M stock which have an exp
ID: 2722064 • Letter: C
Question
Consider a short straddle constructed from options on 3M stock which have an expiration date of June 17, 2016 (the third Friday in June). The following table displays the only possible prices of 3M stock on June 17, as well as the payoffs accruing to someone who holds a short straddle on the stock:
1) A short straddle is created using two options. For each option in the short straddle above, indicate whether it is a put or a call, whether it is bought or sold, and what its strike price is. What is the maximum possible loss on this short straddle? What is the maximum possible loss on a real short straddle?
2) What is the sum of the premiums of the options you identified in part (1)?
3)Why would someone enter into a short straddle?
Stock price $80 $90 $100 $110 $120 Gain from short strangle -$10 $0 $10 $0 -$10Explanation / Answer
Answer
Q.1 In short strangle both put or call is short
Strike price is 100
Maximum loss is unlimited price may be go to infinity or next to worst case 0
Q.2 10
Q.3 If markets assumed to be remain ranged bound