Products & RisksQuestion 54 of 125
An investor establishes a short straddle by selling 1 XYZ 50 call for 3 and selling 1 XYZ 50 put for 2. The maximum gain is:
a.Unlimited
b.$500, if the stock closes exactly at 50 at expiration
c.$300
d.$5,000
Explanation
A short straddle's maximum gain is the total premium received, 3 + 2 = 5 points, or $500, achieved if the stock closes exactly at the 50 strike so that both options expire worthless. The seller profits from low volatility but faces large losses on a big move in either direction.
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