Question

You are interested in a trading strategy with option combinations: straddle or strangle. Both strategies involve buying the equal amount of call and put options underlying the same stock.

1. Consider a straddle using a call with a strike price of $100 and a put with the same strike price and expiration date. The call costs $5 and the put costs $4. For what range of stock prices would the straddle lead to a loss?
2. Now consider a strangle using the same call with a strike price of $100 and a different put with a strike price of $95. Both have the same expiration date. The call costs $5, while the put costs $2 (cheaper than the previous put with the strike price of $100). For what range of stock prices would the strangle lead to a loss?
3. If you believe the stock price can largely increase in the future, which strategy is more attractive – the straddle in Question A or the strangle in Question B?

Answer 1