Question

Which of the following option strategy makes positive profit only when the stock price does not change much, and makes negative profits otherwise.

Select one:

a. Short collar (short put with an exercise price lower than the current stock price, short stock, long call with an exercise price higher than the current stock price)

b. Long straddle (long call, long put with identical exercise prices equal to the current stock price)

c. Long collar (long put with an exercise price lower than the current stock price, long stock, short call with an exercise price higher than the current stock price)

d. Short straddle (short call, short put with identical exercise prices equal to the current stock price)

Answer 1

Option D is correct

Short straddle (short call, short put with identical exercise prices equal to the current stock price)

In short straddle, both put and call options are sold, so if there is no movement in stock price, options expire worthless and premium is the total profit.