Question: Investing problem..........?

The common stock of Rall Corporation has been trading in a narrow range around $50 per share for months, and you are convinced that it is going to stay in that range for the next three months. The price of a three-month put option with an exercise price of $50 is $4. The stock will pay no dividends for the next three months.


What would be a simple options strategy using a put and a call to explain your conviction about the stock’s future movement? What is the most money you can make on this position? How far can the stock price move in either direction before you lose money?

Answer:

If you think a stock is going to trade within a tight range, the best way to profit from them is using a neutral options strategy such as a Butterfly Spread or Condor Spread. An even simpler one would be a short straddle or short strangle. The profitable range and breakeven points of these strategies can be predetermined and customed to your needs by choosing the right strike prices.