USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup

-Refer to Exhibit 16.4. A short straddle is an appropriate strategy if
A) an investor wishes to generate additional income.
B) an investor wished to insure against a decline in share values.
C) an investor expected share prices to be volatile.
D) an investor expected share prices to remain in a trading range.
E) an investor expected share prices to be volatile but was inclined to be bullish.

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the following information on put and call options for Citigroup
 
-Refer to Exhibit 16.4. A short straddle is an appropriate strategy if
A) an investor wishes to generate additional income. 
B) an investor wished to insure against a decline in share values. 
C) an investor expected share prices to be volatile. 
D) an investor expected share prices to remain in a trading range. 
E) an investor expected share prices to be volatile but was inclined to be bullish.

Quizplus · Accepted Answer

A short straddle involves selling both a call and a put option with the same strike price and expiration date. This strategy is most appropriate when an investor expects the stock price to remain in a trading range, as they can collect premiums from both options without being obligated to buy or sell the underlying stock. A short straddle is not suitable for investors who expect the stock price to be volatile as it exposes them to unlimited losses on either the call or put option if the stock price moves significantly in either direction.