CFA Level IDerivativesHard
An investor constructs a long straddle by buying a European call and a European put on the same stock, both with a strike price of $50. The call premium is $4 and the put premium is $3. At expiration, the stock price is $65. What is the investor's total profit per share?
- A$8.00
- B$7.00
- C$11.00
- D$15.00
Show answer & explanationAnswer & explanation
Correct answer: A. $8.00
The call payoff is max(65−50,0)=$15, and the put payoff is max(50−65,0)=$0, so total payoff is $15. Total premium paid is $4+$3=$7. Profit = $15 − $7 = $8.00 per share.
Why the other options are wrong
- B. This is the total premium paid, not the net profit.
- C. This adds an incorrect payoff amount rather than subtracting the total premium correctly.
- D. This is the call payoff alone, ignoring the total premium cost.
Long Straddle Payoff
A long straddle combines a long call and a long put at the same strike, profiting from large price moves in either direction once the combined premium is exceeded.
- Total cost = call premium + put premium
- Profit = combined payoff − total premium paid
- Breakeven points are Strike ± total premium
Memory trick: Straddle the strike — big moves either way pay off once premiums are covered.