Asked by Jalen Taper on May 11, 2024
Verified
The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.
What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement?
A) sell a call
B) purchase a put
C) sell a straddle
D) buy a straddle
Options Strategy
Involves various trades with options and often the underlying assets to capitalize on market movements or protect against risk.
Narrow Range
Narrow Range indicates a situation where there is a small difference between the high and low prices over a set period of time.
Stock Price
The amount at which a share of a company is bought or sold on the stock market.
- Present various strategies employed in options trading along with their respective gains.
Verified Answer
MB
Mario BravoMay 15, 2024
Final Answer :
C
Explanation :
Selling a straddle involves selling both a call and a put option with the same strike price and expiration date. This strategy profits when the underlying stock trades in a narrow range, which aligns with the expectation that Avalon Corporation's stock price will remain around $40.
Learning Objectives
- Present various strategies employed in options trading along with their respective gains.