Straddle Expires ATM?

Discussion in 'Options' started by premtrader, Dec 5, 2012.

  1. What happens to your account when a long straddle expires ATM? Say stock is $50 at expiration and you're:
    Long 1 ABC 50 Call
    Long 1 ABC 50 Put

    a. Flat or no posittion
    b. Long 100 shares of ABC
    c. Short 100 shares of ABC
    d. Both B and C

    I thought it would be undetermined. But that isn't available. I picked A, but isn't A same as D?

    Similarly, what happens when you're short a straddle instead of long? Any help would be greatly appreciated.
     
  2. You taking a portfolio margin test?
    The answer is A because you are long the straddle so you decide what to do. If the stock expires exactly at the strike then your broker will not automatically exercise the options for you, so you will have no position unless you tell them to exercise one or the other.

    If you were short then it would be undetermined until your broker tells you the next day whether or not you got assigned on your options.

    By the way, if you are doing PM, you need to be overly careful because the leverage allowed is not the leverage you should use.
     
  3. Yepp... That is the PM quiz. Thank you for your response and for the warning. I understand the risk and how tempted that could be when you see your BP blew up overnight!

    Couple of other questions that I'm also not sure about...

    1. If you write a call, hoping to benefit from the time decay of the options premium, which of the following would you use?

    a. theta, expressed in %
    b. theta, expressed in $
    c. delta, expressed in %
    d. detla, expressed in $
    e, gamma, expressed in %

    I picked b. But it could be a?

    2. Which of the following choices is a primary component in theoretical options pricing calculations?

    a. volatility
    b. interest rate
    c. stock price
    d. days to expire
    e. strike price
    f. all of the above

    I picked a. But it could be f?

    Thanx in advance! Any help would be greatly appreciated!
     
  4. Last time I checked decay is measured by theta expressed in $, and for 2 all of those are primary components to an option's price.
     
  5. The correct answer is (e): You offset the position before expiration and don't concern yourself with the last bit of option premium remaining and various exercise scenarios. :cool:
     
  6. Yeah. It's just the way they word it, "primary" component? What is primary? What is secondary? They're all inputs to the Black Scholes model. Maybe I'm just thinking too hard.
     
  7. LOL! Agree Naz! Fortunately, there's no (e) for the quiz. That's what I would have picked and failed the quiz. ;) I would never open a long straddle to begin with. And, I would never let it expired long or short.

    -pm