After the market closed today, she hears a news story indicating that a jury decision is expected later tomorrow. Hamlet expects that the stock will move immediately at least 10% either way once the verdict is read. The stock is currently trading for $75.00, and she is focused on at-the-money calls and puts selling for 2.58 and 2.57, respectively. The following morning after the market opens, she goes to place her trade and finds that although the stock price remains at $75.00, the option prices have adjusted to 6.00 for the call and 5.99 for the put.

b) Should Hamlet use a straddle or a strangle? Do these new option premiums have any implications for her intended strategy?

Answer rating: 100% (QA)

Hamlet should use a straddle A straddle involves buying two options one atthemoney call and one atth... View the full answer