YBM has made an offer to buy Hot Products Inc.(HOP;a fictitious name)at $60 per share.The current price of HOP is $50.If the deal fails,HOP stock price will go down below $40 per share.Suppose you decide to obtain some trading profits by creating a straddle.You find that an call has a price of $4 and an put has a price of $3;both options have a strike price of $50 and expire in three months.If you set up a straddle,then you trade:

Question

Quizplus · Accepted Answer

A straddle is a trading strategy that involves buying both a call option and a put option with the same strike price and expiration date. The idea behind a straddle is to profit from a significant move in the underlying stock price, regardless of whether the move is up or down.

In this case, the best straddle to use would involve buying a call option and a put option with a strike price of $50 and an expiration date of three months. The call option has a price of $4, while the put option has a price of $3.

If the deal for YBM to buy HOP goes through, the stock price will likely rise to $60, which would result in a profit for the call option. However, if the deal falls through, the stock price will likely drop below $40, which would result in a profit for the put option.

By buying both options, the investor is essentially betting on the stock price making a large move in either direction. This way, they can profit no matter which way the stock moves. Therefore, the best choice is to trade a long call and a long put.

YBM Has Made an Offer to Buy Hot Products Inc