35 40 45 2 Option trading strategies A stock is currently trading at $40. A wily trader sees the following options trading in the market: Maturity Strike Call Price Put Price 6 months 5.631 0.602 6 months 2.350 2.317 6 months 0.722 5.685 She has $2 million to invest, and wishes to speculate on volatility increasing. 1. If she constructs a straddle using the options with strike price 40, how many positions can she afford? 2. If she contructs a strangle using the put with strike 35 and the call with strike 45, how many positions can she afford? 3. If she builds a strip from 1 at the money call and 2 at the money puts, how many positions can she afford? 4. Six months later, the trader will close out her position. For what set of stock prices does the straddle give her the highest return? For what set of prices is the strangle best? For what set of prices is the strip best