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20 March, 22:58

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to move away sharply from the range in the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement?

A. Sell a call.

B. Purchase a put.

C. Sell a straddle.

D. Buy a straddle.

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  1. 20 March, 23:50
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    C. Sell a straddle

    Explanation:

    Considering the following calculation: Sell a straddle = sell a put + sell a call

    and,

    Premium income for selling a straddle = (P + C) 100 = ($3 + $4) (100) = $700.

    a short straddle involves simultaneously selling a put option and call option with the same underlying asset, same exercise price and expiration date

    By Selling a 3 month put option with exercise price of $40 one will get $3 (inflow of $3)

    Simulatenously By Selling a 3 month call option with exercise of $40 one wiil get $4 (inflow of $4)

    Thus the total premium income of selling a straddle is $7
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