Series 7 - General Securities Representative Exam
Preview Mode
By definition, an investor buys a call when anticipating higher prices and buys a put when anticipating lower prices. So, when does an investor sell an at the money straddle?
When buying a strangle is too inexpensive given the volatility and the commissions involved with the legs
A
When options volatility is low and the price of the underlying asset should move sharply; like before an earnings release
B
The investor anticipates that the price of the underlying asset will exceed the strike price of the straddle plus the amount of premium collected
C
The investor anticipates the underlying asset to trade between the strike price of the straddle plus and minus the amount of premium collected
D
Explanations
An investor sells a straddle and collects the premium of the sold call and put. The investor wants the price of the underlying security to stay within a range between the strike price plus the amount of premium collected (for the upside of the range) and the strike price minus the amount of premiu