Question

4. A trader buys a call option and sells a put option. The options have the same underlying asset, strike price, and maturity. Describe the trader's position. What is the advantage to making such a trade?

Answer 1

When the trader is buying a call option and he is selling a put option of similar strike price and similar maturity, it will mean that he is highly bullish on the prospect of the stock and he believes that the stocks are going to go up.

Buying of a stock will mean that the trader is bullish on the upside of the company and he wants the company to go up in order to make money on the call option and shorting of the put option will also mean that he believes that the price of the company is not going to fall so he has Shorted the the put option and he has received the premium on it it will mean that it he will be having a double exposure to the upside and the downside and he will be getting a higher amount of money if the share is going to go up because he will be eating the premium of the put option and he will gain the the additional money on the appreciation of the share, but if the companies share price are going to fall, he will be going to lose his significant chunk of exposure because his call options value is going to fall and the put option value is going to rise and since she had shorted the put option, he will be a loser on the downfall in the prices of the company.

One of the advantage of such position is one can fund the buying of call option through selling of put option as he will be receiving premium on the selling of put option.