Equity shares of Shrill Ltd. are being currently sold for ₹450 per share. Both the call option and put option for a 3-month period are available for a strike price of ₹485 at a premium of ₹15 per share and ₹10 per share

CS Professional · Financial, Treasury and Forex Management · PYQS · June 2016
Equity shares of Shrill Ltd. are being currently sold for ₹450 per share. Both the call option and put option for a 3-month period are available for a strike price of ₹485 at a premium of ₹15 per share and ₹10 per share respectively. Naresh, an investor, wants to create a straddle position in this share. Find out his net pay-off at expiration of the option period, if the share price on that day happens to be ₹450 or ₹525.

Answer & Explanation:

A straddle position means that the investor will buy the call option as well as the put options and pay the premium on both options. The net pay off position may be found as follows: Total premium paid = ₹15 + ₹10 = ₹25 If share price happens to be ₹450 then call option will not be exercised Net pay off = Pay off on put option - Premium paid = (₹485 - ₹450) - ₹25 = ₹10 If share price happens to be ₹525 then put option will not be exercised Net pay off = pay off on call option - premium paid = (₹525 - ₹485) - ₹25 = ₹15 So the investor will be benefitted whether price is less than or more than the strike price on the expiry of date.

Topics: Derivatives

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