Working as an intern, you get to observe the strategies of Mr X, who is an experienced option trader.  Mr X is expecting extreme volatility on Twitter (TWTR) share price in coming weeks, as Elon Musk attempts to buy the company.

Mr X sets up a long straddle on TWTR as follows:

• one long call option on TWTR, with a strike price of $40 and a premium of $3.60
• one long put option on TWTR, with a strike price of $40 and a premium of $5.40.

However, in addition to the above trades, Mr X also shorts a call option on TWTR with strike price of $55 and premium of 60 cents.

 

Required:

Explain the rational for adding this short call option to the long straddle. What are the advanatages and disadvantages for the option-trading strategy of shorting this call?
 

In addition to providing a written rationale, your answer would benefit from mentioning key numbers central to the strategies.

Answer rating: 100% (QA)

Mr Xs addition of a short call option with a strike price of 55 to the long straddle creates a long ... View the full answer