Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net profit on the strap?
The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.
A. $200
B. $300
C. $700
D. $400
C. $700
Selling a strap entails selling two calls and selling one put. Initial income = 2C0 + P0 = [(2)(4) + 3](100) = $1,100. If the final stock price is $42, the position profit is found as Profit = [-2Max ($0, $42 - 40) + Max ($0, $40 - $42)](100) + $1,100 = $700
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