Question

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.

What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement?

A) sell a call

B) purchase a put

C) sell a straddle

D) buy a straddle

Answer

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