Question

Which options do you need to create the following product?

a) 10 Long 100 Strike Calls and 20 Long 100 Strike Puts
b) 20 Long 100 Strike Calls and 20 Long 100 Strike Puts
c) 20 Long 100 Strike Calls and 40 Long

Answer 1

The correct choice to create the desired options product is 20 Long 100 Strike Calls and 20 Long 100 Strike Puts, which forms a straddle strategy, typically used when expecting high volatility. Therefore, the correct answer is Option B.

Step-by-step explanation:

The student's question pertains to the creation of a specific combination of options contracts. To create the desired product, known as a straddle, the correct choice would be:

b) 20 Long 100 Strike Calls and 20 Long 100 Strike Puts

A straddle is a popular options trading strategy that involves buying a call option and a put option with the same strike price and expiration date. By purchasing 20 calls and 20 puts, both with a strike of 100, the investor is poised to benefit from significant movements in the underlying asset's price in either direction. This strategy is best utilized when the investor anticipates high volatility in the underlying asset but is uncertain about the direction of the future price movement.