Question

Which one of the following is a correct statement? i. Straddles do well with extreme moves in stock prices, regardless of whether the move is upward or downward. ii. Shorting a Straddle implies investors bets on low volatility iii. A covered call strategy benefits from price instability environment iv. Protective put can be considered insurance for an investment in a portfolio of stocks

A) All the above B) I, II, & IV
C) II&IV
D) I&III

Answer 1

• Straddle means buying a put option as well as call option. If the prices falls below the breakeven point, we exercise the put option and make profits similarly if the prices moves upwards beyond the break even point we make profits. Hence straddles do well in extreme stock volatility
• Similarly investors shorting a straddle is betting on low volatility
• Covered call is used to earn an additional income on stock. In this strategy, investor writes a call who already owns the underlying stock. He does not expect the prices to increase much. Hence it does not benefit under price instability environment
• Protective put is buying a put option who is holding an underlying long position in stock. This is done to cover the downside risk of the stock

Hence, Statement I , II & IV is correct

Correct option B