
Explanation:
A strap strategy is an options strategy that involves holding two calls and one put with the same strike price and expiration date. This strategy is used when the trader believes that the underlying stock will experience significant volatility in the near term. The two calls provide profit if the stock price increases, while the put limits the loss if the stock price decreases. In this case, the investment manager purchased two 6-month European call options and one 6-month European put option on the stocks of a specific firm with the same strike price. This aligns with the definition of a strap strategy, making choice C the correct answer.
Choice A is incorrect. A straddle strategy involves buying a call and put option with the same strike price and expiration date. This strategy is used when an investor believes there will be a large price movement but is unsure of the direction. In this case, the manager bought two call options and one put option, which does not align with a straddle strategy.
Choice B is incorrect. A strip strategy involves buying two put options and one call option with the same strike price and expiration date. This strategy is used when an investor believes that there will be a significant downward movement in the stock's price. However, in this scenario, the manager bought two call options and one put option which corresponds to a strap strategy rather than a strip.
Q.782 An investment manager has realized that there is a great potential for profits in the options market without tying up much capital. To test the potential of options trading, he implemented a spread strategy by purchasing two 6-month European call options on stocks of a specific firm with the strike price of X and, at the same time, buying a 6-month European put option on the stocks of the same firm with the same strike price. Which strategy is he most likely using?
A
Straddle strategy
B
Strip strategy
C
Strap strategy
D
Strangle strategy
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