Master Straddles – Series 7 & Series 9
Exam Quiz with Answers

A long straddle consists of buying both a call and a put at the same strike price. The investor profits when the stock moves significantly in either direction.

Step 1: Calculate Total Cost (Max Loss)

The total premium paid:

Call premium: $5
Put premium: $4
Total cost (debit): $5 + $4 = $9 per share
Step 2: Determine the Call’s Value at Expiration

Since XYZ stock is at $60, the call option is in the money:

Call Intrinsic Value = Stock Price – Strike Price
$60 – $50 = $10
Step 3: Determine the Put’s Value at Expiration

Since XYZ stock is above the strike price, the put expires worthless (Intrinsic Value = $0).

Step 4: Calculate Total Value at Expiration

Call Value: $10
Put Value: $0
Total Value = $10 + $0 = $10
Step 5: Calculate Gain or Loss

Total Value = $10
Total Cost (Premium Paid) = $9
Profit/Loss = $10 - $9 = $1 gain

A long straddle consists of buying both a call and a put at the same strike price. The investor profits if the stock makes a significant move in either direction.

Step 1: Calculate Total Cost (Max Loss)

Call premium: $6
Put premium: $5
Total cost (debit): $6 + $5 = $11 per share
Step 2: Determine the Call’s Value at Expiration

Since ABC stock is at $81, the call option is in the money:

Call Intrinsic Value = Stock Price – Strike Price
$81 – $80 = $1
Step 3: Determine the Put’s Value at Expiration

Since ABC stock is above the strike price, the put expires worthless (Intrinsic Value = $0).

Step 4: Calculate Total Value at Expiration

Call Value: $1
Put Value: $0
Total Value = $1 + $0 = $1
Step 5: Calculate Gain or Loss

Total Value = $1
Total Cost (Premium Paid) = $11
Profit/Loss = $1 - $11 = $10 loss

A short straddle consists of selling both a call and a put at the same strike price. The investor profits if the stock stays near the strike price, allowing both options to expire worthless.

Step 1: Calculate Total Premium Received (Max Profit)

Since the investor is selling both options, they collect:

Call premium: $7
Put premium: $6
Total premium received: $7 + $6 = $13 per share
Step 2: Determine the Call’s Value at Expiration

Since DEF stock is at $100, the call option is in the money:

Call Intrinsic Value = Stock Price – Strike Price
$100 – $90 = $10
Step 3: Determine the Put’s Value at Expiration

Since DEF stock is above the strike price, the put expires worthless (Intrinsic Value = $0).

Step 4: Calculate Total Liability at Expiration

Call Obligation: $10
Put Obligation: $0
Total Liability = $10 + $0 = $10
Step 5: Calculate Gain or Loss

Premium Received = $13
Amount Paid to Cover Short Call = $10
Profit/Loss = $13 - $10 = $3 gain

A short straddle consists of selling both a call and a put at the same strike price. The investor profits if the stock stays near the strike price, allowing both options to expire worthless. However, significant price movement leads to losses.

Step 1: Calculate Total Premium Received (Max Profit)

Since the investor is selling both options, they collect:

Call premium: $5
Put premium: $4
Total premium received: $5 + $4 = $9 per share
Step 2: Determine the Call’s Value at Expiration

Since GHI stock is at $58, the call option expires worthless (Intrinsic Value = $0).

Step 3: Determine the Put’s Value at Expiration

Since GHI stock is below the strike price, the put is in the money:

Put Intrinsic Value = Strike Price – Stock Price
$70 – $58 = $12
Step 4: Calculate Total Liability at Expiration

Call Obligation: $0
Put Obligation: $12
Total Liability = $0 + $12 = $12
Step 5: Calculate Gain or Loss

Premium Received = $9
Amount Paid to Cover Short Put = $12
Profit/Loss = $9 - $12 = $3 loss

A long straddle consists of buying both a call and a put at the same strike price. The investor profits if the stock moves significantly in either direction, but they need to cover the total premium paid before realizing a profit.

Step 1: Calculate Total Premium Paid

Call premium: $6
Put premium: $4
Total cost (debit): $6 + $4 = $10 per share
Step 2: Determine the Breakeven Points

A long straddle has two breakeven points:

Upper Breakeven (for the call) = Strike Price + Total Premium Paid
$40 + $10 = $50
Lower Breakeven (for the put) = Strike Price - Total Premium Paid
$40 - $10 = $30
Step 3: Identify the Correct Answer

The breakeven prices are $30 and $50.

A short straddle consists of selling both a call and a put at the same strike price. The investor profits the most when the stock remains close to the strike price, allowing both options to expire worthless. However, if the stock moves significantly in either direction, losses occur.

Step 1: Calculate Total Premium Received (Max Profit)

Call premium: $8
Put premium: $7
Total premium received: $8 + $7 = $15 per share
Step 2: Determine the Breakeven Points

A short straddle has two breakeven points:

Upper Breakeven (for the call) = Strike Price + Total Premium Received
$60 + $15 = $75
Lower Breakeven (for the put) = Strike Price - Total Premium Received
$60 - $15 = $45
Step 3: Identify the Correct Answer

The breakeven prices are $45 and $75.

A long straddle consists of buying both a call and a put at the same strike price and expiration. This strategy benefits when the stock price moves significantly in either direction—either up (benefiting the call) or down (benefiting the put). The investor is not betting on a specific direction but rather on increased volatility in the stock.

Since the primary expectation is a large price movement, the best description of this strategy’s market outlook is volatility.

A short straddle consists of selling both a call and a put at the same strike price and expiration. The investor profits when the stock price remains near the strike price, allowing both options to expire worthless and keeping the premium received.

Since the strategy benefits from a lack of price movement, the investor is expecting low volatility or a stable market.