A portfolio consisting of one put option and one call option, both with the same exercise price, is a good investment strategy for investors who don't know whether an asset's value is likely to go up or down but think that the volatility of the asset will increase.

Question

Quizplus · Accepted Answer

By buying both a put option and a call option with the same exercise price, the investor is essentially creating a synthetic long or short position in the underlying asset. If the asset's value goes up, the call option will generate profits, while the put option will expire worthless. Conversely, if the asset's value goes down, the put option will generate profits, while the call option will expire worthless. By holding both options, the investor can profit from any movement in the asset's price. Additionally, if the volatility of the asset increases, the value of both options will also increase, potentially leading to higher profits. Therefore, this strategy can be a good investment for investors who want to capitalize on an increase in volatility without knowing which direction the asset will move.

A Portfolio Consisting of One Put Option and One Call