Question

If you own a call and a put on a stock with the same exercise price and exercise date, your payoffs:

• A. will be positive only if the stock price rises.

• B. will always be positive but will be larger if the stock price is relatively stable.

• C. will always be positive and will increase with the size of the stock price change.

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

If you are buying a Call & a put at the same strike price & same expiration date strategy is called a long straddle.

You have paid a premium for call and put. If the stock price moment is relatively stable then you won't realise much of pay off, hence loss.

Stock price goes VERY DOWN, you will realise the profit from PUT.

Stock price goes VERY UP, you will realise the profit from CALL.  

hence it will increase with an % increase in stock volatility (i.e stock price change).

Therefore answer is C.