FINRA Series 7Investment Information and Suitable RecommendationsMedium
A technician observes that ABC stock has been trading in a narrow range between $48 and $52 for several months. The technician believes the stock will remain range-bound in the near future. Which options strategy would be MOST appropriate for this outlook?
- AShort Straddle
- BLong Put
- CLong Straddle
- DLong Call
Show answer & explanationAnswer & explanation
Correct answer: A. Short Straddle
A short straddle (selling both a call and a put with the same strike price and expiration date) is a neutral strategy that profits when the underlying asset's price remains stable and experiences low volatility. The investor collects premiums if the options expire worthless.
Why the other options are wrong
- B. A long put is a bearish strategy, expecting the stock price to fall significantly.
- C. A long straddle profits from significant price movement (high volatility), which is contrary to the technician's outlook.
- D. A long call is a bullish strategy, expecting the stock price to rise significantly.
Short Straddle
A short straddle is an options strategy where an investor sells both a call option and a put option on the same underlying asset, with the same strike price and expiration date. It is a neutral strategy that profits from low volatility and a stable stock price.
- Selling both a call and a put.
- Same strike price, same expiration.
- Profits from low volatility and time decay.
- Unlimited risk if stock moves significantly.
Memory trick: Short Straddle for Stable Stock, Long for Leap.