Question

A one-month European put option on Bitcoin is with the strike price of $8,705 is trading at $480. A one-month European call option on Bitcoin with the strike price of $8,705 is trading at $500. An investor shorts a straddle using these options. What is the maximum gain for this investor?

Answer 1

Short Straddle means selling call and put option at same strike. This is a strategy for less volatile market. If an investor thinks that stock price will not move, then the investor enters into this strategy.

When you sell call and put, you earn premiums.

So at the start of the strategy the inflow is = Premium from call + Premium from put

= 480 + 500

= 980

Now $980 is the maximum profit an investor can earn if the stock price remains at $8705. If the stock price moves up, then the investor will lose in Short call and vice versa.

The maximum gain is $980

If you find the solution helpful, then please give rating.