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YBM has made an offer to buy Hot Products Inc. (HOP; a fictitious name) at $60...

YBM has made an offer to buy Hot Products Inc. (HOP; a fictitious name) at $60 per share. The current price of HOP is $50. If the deal fails, HOP stock price will go down below $40 per share. Suppose you decide to obtain some trading profits by creating a straddle. You find that an call has a price of $4 and an put has a price of $3; both options have a strike price of $50 and expire in three months. If you set up a straddle, then you trade:

a long call and a long put

a long call and a short put

a short call and a short put

a short call and a long put

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Answer #1

A straddle is a strategy where an investors buys both the call and the put options. He goes long for both call and put .The underlying asset, the strike price and the expiration date is same for both the call and the put.

Both call and put are expensive options and these options provide an exposure in a volatile stock for making profits.

So, the correct option is option A.

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