Question

E. None above The following information is used for Question 14-17; You want to establish a straddle on Apple. The available call premium is $5 and put premium is $6. Suppose X-S50 for both the call and the put. fit of this strategy?

Answer 1

Please note that the question doesn't clearly specify whether we are buying a straddle or selling a straddle. The question only mentions that "You want to establish a straddle on apple". So we have solved the problems under 2 scenarios :-

Scenario 1 : Buying a Straddle

Scenario 2 : Selling a Straddle

Scenario 1 : Buying a Straddle

16.

An investor who buys a straddle profits when the underlying volatility is large. Hence, the expectation of investor will be that "Underlying price volatility is going to be large." Correct answer is Option C

17.

Total cost of straddle = (5+6) = 11

Hence, break-even points are :-

(50-11) = 39

(50+11) = 61

Correct answer is Option B

Scenario 2 : Selling a Straddle

16.

An investor who sells a straddle profits when the underlying volatility is small. Hence, the expectation of investor will be that "Underlying price volatility is going to be small." Correct answer is Option D