Problem
An investor expects a major move in a stock currently trading at S_0 = K = \100$ but has no view on direction. They buy an at-the-money straddle:
- Long 1 call with K = \100C = $5$
- Long 1 put with K = \100P = $4$
Both options share the same expiry; each contract covers 100 shares.
Questions
- What is the total cost per share?
- What is the maximum loss, and when does it occur?
- What are the two breakeven stock prices at expiry?
- What is the profit per share if S_T = \115S_T = $88$?