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Answer: If the stock price falls within \$15.00 and \$25.00
**A. TRUE:** If the stock price falls within $15.00 and $25.00 This portfolio is a trading strategy called a short strangle or top vertical combination, which is a variation on the more common straddle. In a straddle, the investor buys a (European) call and put with identical strike prices and maturities. This is not a directional trade but rather a sort of volatility trade because it gains if the stock prices increase or decrease dramatically. The strangle is a variation because, in the strangle, the call's strike price is higher than the put's strike price. Writing the strangle, as illustrated in this question, is a short volatility trade because it is exposed to losses if the stock price increases or decreases greatly. Specifically, the initial cash inflow (the two premiums) is $1.75 + $1.25 = $3.00. Therefore, breakeven occurs when the payoff is $3.00, which occurs when the stock price drops below $15.00 (because the exercised put will cost $3.00 at this price) or when the stock price increases above $25.00 (because the exercised call will cost $3.00 at this price). This short strangle generates a net profit if the stock price falls within {$15.00, $25.00}.
Author: Manit Arora
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Q-21.9.1. Ralph creates a portfolio with two positions: a short call and a short put with identical maturities on the same stock that has a current price, S(0) = \`20.00$. His short call with a strike price, $K_1 = \, has a premium, c_1 = \`1.75$. His short put with a strike price, $K_2 = \, has a premium, p_1 = \`1.25$. Both options are out-of-the-money by the same amount of $\. Recall that option profit is equal to the payoff net of the premium, and we (typically) ignore the impact of discounting. On the future date with both options mature, under which future stock price scenario is Ralph's trade profitable?
A
If the stock price falls within `15.00` and \`25.00`
B
His portfolio will always generate a small profit
C
If the stock price is less than `18.00` or greater than \`22.00`
D
His portfolio will generate a small profit if volatility decreases
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