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An option writer sells a “Strangle” with strike prices of $33 for the put and $41 for the call on BHP shares, that costs $0
An option writer sells a “Strangle” with strike prices of $33 for the put and $41 for the call on BHP shares, that costs $0.26 and $0.06 respectively. What is the profit (loss) for the option writer from this strategy if BHP’s share price at expiry of the options is $37? One option contract is for 1000 shares.
Group of answer choices
A. Loss of $8320
B. Loss of $7680
C. Profit of $320
D. Profit of $4320
Expert Solution
- C. Profit of $320
Sold put option of strike price of $ 33 having premium $ 0.26
Sold call option of strike price of $ 41 having premium $ 0.06
We know that; sold put option of strike price $33 will give loss if the price of the share goes below $ 33 but will not be excercised and given no loss if price is on or above $ 33.
We also know that; sold call option of strike price $41 will give loss if the price of the share goes above $ 41 but will not be excercised and given no loss if price is on or below $ 41.
In the given situation that share price on expiry is 37, so neither the call option not the put option will be excercised against the option writer and the whole option premium on call and put will be the profit.
Therefore,
Option profit= (Call premium * 1000) + (Put premium * 1000)
Option profit= (0.06 * 1000) + ( 0.26* 1000)
Option profit= $60 + $260
Option profit= $ 320
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