The common stock of the Avalon Corporation has been trading in a narrow range ar
ID: 2768439 • Letter: T
Question
The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. Calculate the total premium income of selling (shorting) a straddle (a short straddle involves simultaneously buying a put option and call option with the same underlying asset, same exercise price and expiration date). Show all work please
Explanation / Answer
a short straddle involves simultaneously selling a put option and call option with the same underlying asset, same exercise price and expiration date
By Selling a 3 month put option with exercise price of $40 one will get $3 (inflow of $3)
Simulatenously By Selling a 3 month call option with exercise of $40 one wiil get $4(inflow of $4)
Thus the total premium income of selling a straddle is $7