Problem 1 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 (you can insert a table or use spacing to present the information in the form of a table) (8 marks) For what range of prices of the underlying stock you would be making a positive profit (4 marks) What is the maximum profit you could possibly get from selling this straddle (3 marks) What aspects relating to a traders 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 (5 marks)

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Question: Problem 1 As an option trader you decide to sell a straddle by selling a put option and a call option on the same stock.

Problem 1

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 (you can insert a table or use spacing to present the information in the form of a table). (8 marks)
For what range of prices of the underlying stock you would be making a positive profit? (4 marks)
What is the maximum profit you could possibly get from selling this straddle? (3 marks)
What aspects relating to a traders 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. (5 marks)

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