Practice Problem – Straddle Options

Practice Question

Intro to Finance
Options
Call and Puts
MCQs

An investor simultaneously buys a call option and a put option. Both options have the same expiration date, same strike price, and they are written on the same stock. His total payoff will: _______________

A) Increase as the stock price increases above the strike price.

B) Increase as the stock price decreases below the strike price.

C) Will not change with change in the stock price.

D) Both A and B.

E) Insufficient information for answering the question.

Answer +
D) Both A and B.
Explanation +
Understanding the Strategy

This is a classic straddle strategy, where the investor buys both a call and a put option with the same strike and expiration.

Payoff When Price Increases

If the stock price rises above the strike, the call becomes valuable. The investor buys low (strike) and sells high (market). The put expires worthless.

Payoff When Price Decreases

If the stock price falls below the strike, the put becomes valuable. The investor sells high (strike) and buys low (market). The call expires worthless.

Conclusion

In either scenario—price rising or falling—the investor gains. Therefore, total payoff increases in both directions. The correct answer is: D) Both A and B.