Question

State whether you agree or disagree with the following statement. Explain why.

“A stock price has been quite volatile lately, and the market's expectation is that high volatility will continue. You, on the other hand, expect the stock's price volatility to decrease significantly in the next three months. If you are not sure of the direction of the price change, you can speculate on this expectation by selling both call and put options (not just calls or just puts) on the stock as opposed to buying call and put options on the stock”.

(Note: You are only considering call and put positions on this stock. You are not considering other ways to profit from your expectation.)

(Maximum 3 sentences, maximum 100 words.)

Answer 1

I agree with the above statement

When volatility decreases the price of stocks tends to move in a range, this causes Option to loose their premium normally known as time decay. Thus when volatility comes down sellers of the option makes money. Hence the strategy of selling both call and option will result in profitability if volatility is low and stock moves in a fixed range