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

Question

Quizplus · Accepted Answer

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.

The Common Stock of the Avalon Corporation Has Been Trading