3. You are trying to put together a straddle where you buy a call and a...

Transcribed Image Text:

3. You are trying to put together a straddle where you buy a call and a put, each with strike $25. You have decided that the most you are willing to pay for the position is $5.90. You look into the limit order books for both options and see the following quotes in the market: Option Call Put Bid Ask $3.80 $4.30 $3.55 $4.00 Assume that the quantities trading in the options are sufficiently large to fill your order. (a) Suppose that you bought the call using a market order, what would you be willing to buy the put for? 5 marks (b) Suppose that you bought the put using a market order, what would you be willing to buy the call for? 2 marks (c) If you place these two limit orders in the market, what will the limit order book look like? 2 marks Hint: the Bid and Ask will change if your limit orders are more competitive than the rest of the market. 3. You are trying to put together a straddle where you buy a call and a put, each with strike $25. You have decided that the most you are willing to pay for the position is $5.90. You look into the limit order books for both options and see the following quotes in the market: Option Call Put Bid Ask $3.80 $4.30 $3.55 $4.00 Assume that the quantities trading in the options are sufficiently large to fill your order. (a) Suppose that you bought the call using a market order, what would you be willing to buy the put for? 5 marks (b) Suppose that you bought the put using a market order, what would you be willing to buy the call for? 2 marks (c) If you place these two limit orders in the market, what will the limit order book look like? 2 marks Hint: the Bid and Ask will change if your limit orders are more competitive than the rest of the market.