Long Straddle Breakeven Points and Market Outlook
An investor purchases 1 XYZ July 60 Call at 4.25 and purchases 1 XYZ July 60 Put at 2.75 when XYZ stock is trading at $60. To achieve profitability at expiration, what price levels must XYZ stock cross?
A long straddle has two breakeven points: Strike plus Combined Premium ($60 + $7 = $67) and Strike minus Combined Premium ($60 - $7 = $53). Profit occurs OUTSIDE this band.
Complete Analysis & Legal Rationale
A long straddle involves buying a call and a put with identical strikes ($60) and expirations (July). Total premium paid = $4.25 + $2.75 = $7.00. For the call to profit after paying both premiums, stock must exceed $60 + $7 = $67. For the put to profit, stock must fall below $60 - $7 = $53.
Mathematical Step-by-Step Derivation
- Step 1: Combined Premium = $4.25 + $2.75 = $7.00.
- Step 2: Upside Breakeven = Strike ($60) + $7.00 = $67.00.
- Step 3: Downside Breakeven = Strike ($60) - $7.00 = $53.00.
- 1 July 60 Call-$425.00
- 1 July 60 Put-$275.00
- Exercise proceeds at expirationVariable
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Applies dual premium addition and subtraction from the common strike.
Calculates breakevens independently for each leg without combining the cost.
Describes short straddle profitability window rather than long straddle.
Ignores the put leg completely.
Official Standard: Requires disclosure of volatility sensitivity and dual-premium breakevens.