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 three months. The price of a three-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 share price's future movement?
A)Sell a call
B)Purchase a put
C)Sell a straddle
D)Buy a straddle

Question

Quizplus · Accepted Answer

Selling a straddle involves selling both a put and a call with the same strike price and expiration date. In this case, since the investor believes the stock will stay within a narrow range, selling a straddle would allow them to collect the premium from both options while limiting their potential losses if the stock were to sharply move upwards or downwards. The premium collected from selling the straddle would be $7 ($3 from the put and $4 from the call).

The Common Stock of the Avalon Corporation Has Been Trading