As an option trader you decide to sell a straddle by selling a put option and a
Question:
As an option trader you decide to sell a straddle by selling a put option and a call option on the same stock. The put option has a strike price of K1 = $50 and is priced for P = $5, and the call option has a strike price K2 = K1 = $50 and priced for C = $7.
Construct a table showing the payoff and profit you would get from this strategy based on the stock price.
For what range of prices of the underlying stock you would be making a positive profit?
What is the maximum profit you could possibly get from selling this straddle?
What aspects relating to a trader’s views regarding stock price movements affect his/her decision when choosing between buying a straddle or buying a strangle? Explain in which case he/she would choose one of these 2 strategies and not the other.
Investment Analysis and Portfolio Management
ISBN: 978-0538482387
10th Edition
Authors: Frank K. Reilly, Keith C. Brown