Consider a short straddle constructed from options on 3M stock which have an expiration date of June
Question:
Consider a short straddle constructed from options on 3M stock which have an expiration date of June 17, 2016 (the third Friday in June). The following table displays the only possible prices of 3M stock on June 17, as well as the payoffs accruing to someone who holds a short straddle on the stock:
| Stock price | $80 | $90 | $100 | $110 | $120 |
| Gain from short strangle | -$10 | $0 | $10 | $0 | -$10 |
a. A short straddle is created using two options. For each option in the short straddle above, indicate whether it is a put or a call, whether it is bought or sold, and what its strike price is. What is the maximum possible loss on this short straddle? What is the maximum possible loss on a real short straddle?
b. Explain your answer to all of the above questions.
c. What is the sum of the premiums of the options you identified in part (a)?
Explain.
Expert Answer:
There are 3 types of speculation strategies a Combination Strategy b Spread Strategy c Synthetic Strategy Straddle is one of the combination strategy ... View the full answer
