Question

You want to use an investment strategy by selling a call option and a put option. Answer the next three questions using the following information. Sell a call option with an exercise price of $1.54 for a premium of $0.03. Sell a put option with an exercise price of $1.54 for a premium of $0.03.

A. this type of strategy is called a:

a. long butterfly b. short butterfly c. long straddle d. short straddle

B.this strategy would be profitable when the price of underlying currency is expected to?

a. this strategy will provide a positive profit for any price changes. b. be stable c. dramatically fall d. dramatically rise

Answer #1

Sell a call option with an exercise price of $1.54 for a premium of $0.03. Sell a put option with an exercise price of $1.54 for a premium of $0.03.

A. this type of strategy is called a **short
straddle.**

In a short straddle we sell a call and a put at the same strike price and same expiry.

A long butterfly and a short butterfly involves only call options of three different strike prices.

A long straddle involves buying of a call and put for the same expiry at the same strike price.

B. This strategy would be profitable when the price of
underlying currency is expected to **be stable.**

The maximum profit of a short straddle is when the stock doesn't move at all and expires at the strike price.

If the stock price either increase or decrease dramatically, then short straddle would result in a loss.

Short straddle will not give profit for any price change.

Straddle: Long $80 Call at $6, Long $80 Put at $4
Top Strangle: Short $75 Put for $9, Short $85 Call for $11
For each of the 2 option strategies below
please:
Calculate the initial cash flow (CF0)
Produce a table showing the Value and Profit at expiration
(VT and ΠT) for each relevant range of the
underlying stock price (ST)
The range over which the strategy is profitable

A strap option strategy is created by purchasing two call
options and one put option of the same underlying stock. The
options have the same exercise price (E=50) and same expiration
date.
a) What is the payoff of the strategy is the stock price is
$0?
c) What is the payoff of the strategy is the stock price is
$100?

Assume the August call and put option on Swiss francs have the
same strike price of 58½ ($0.5850/SF), and premium of $0.005/SF. In
what price range the purchase of the PUT option would choose to
exercise the option?
a) At all spot rates above the strike price of 58.5
b) At the strike price of 58.5
c) At all spot rates below the strike price of 58.5
d) At all spot rates below the 59 (strike price of 58.5 plus...

What option strategy (e.g. long put, short put, long call, short
call) has the greatest risk of loss? Explain

Which of the following would be an advantage of a short straddle
option strategy?
a. A precipitous drop in price
b. A precipitous rise in price
c. The price of the underlying asset remains near the strike
price
d. None of the would be a disadvantage of a straddle

) You invest in the stock of Valleyview Corp. and purchase a put
option on Valleyview Corp. This strategy is called a ________.
A) long straddle
B) naked put
C) protective put
D) short stroll

Which 1-yr option strategy will give the highest expected net
profit if you are confident that the underlying stock price will be
less volatile over the next year than what the market prices
reflect? (Please explain)
A. Long put and long call
B. Short put and short call
C. Long put and short call
D. Short put and long cal

Short a call option with a strike price of $1.25 and a premium
of $0.12. Long a call option with a strike price of $1.35 and a
premium of $0.02 Short a put option with a strike price of $1.35
and a premium of $0.03 Draw a final contingency graph including
breakeven mas loss/gain.

A synthetic long call option can be created
from put-call parity relation as follows:
Buy the call option, sell the stock, and sell a bond that pays
the option’s exercise price at maturity
Buy the call, sell the stock, and buy a bond that pays the
exercise price at maturity
Sell the call, buy the stock, and sell a bond that pays the
exercise price at maturity
Buy the stock, buy the put, and sell a bond that pays the...

A stock currently sells for $100. A 9-month call option with a
strike of $100 has a premium of $10. Assuming a 5% continuously
compounded risk-free rate and a 3% continuous dividend yield,
(a) What is the price of the otherwise identical put option?
(Leave 2 d.p. for the answer)
(b) If the put premium is $10, what is the strategy for you to
capture the arbitrage profit?
a. Long call, short put, long forward
b. Short call, long put,...

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