Question

You are working as a portfolio manager in a small private fund. You have been analysing equities and found out that Apple stock price will be stable in coming months. You are going to use options to capitalise on your beliefs. Taking into account that your funds are modest and you are the only analyst in the fund, you will:

Select one:

a. Write a put and buy a call with lower strike

b. Write a call and buy a put with lower strike

c. Go short in call and put options with the different exercise prices

d. Go long in call and put options with the same strike

e. Buy one put and write another put with lower strike

f. Go long in call and put options with the different exercise prices

g. Write a put and buy a call with higher strike

h. Buy one call and sell another call with lower strike

i. Buy one put and write another put with higher strike

j. Write a call and buy a put with higher strike

k. Go short in call and put options with the same strike

l. Buy one call and sell another call with higher strike

Answer 1

Solution:

It is expected that the stock price of Apple will not move much and will remain stable. In this case, we can opt for a short straddle option strategy to gain maximum profit.

Short straddle: In this strategy, we will sell or go short in call option and put option with the same strike price and this strike price will be close to the current stock price. By selling the call and put option we will earn the premium and when the stock price of Apple is close to strike price at the expiry then profit is maximum

We can understand this by an example-

Suppose the current stock price of Apple =150

Strike price = 150

Call option premium = 10

Put option premium = 10

Then when we opt for this strategy and at the time of expiry when stock price of Apple is 150 then our profit will be 10 + 10 = 20

Correct option is K) Go short in call and put options with the same strike