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3. You are trying to put together a straddle where you buy a call and a put, each with strike $25. You have decided that the most you are willing to pay for the position is $5.90. You look into the limit order books for both options and see the following quotes in the market: Option Call Bid Ask $2.80 $3.30 Put $2.55 $3.00 Assume that the quantities trading in the options are sufficiently large to fill your order.

3. You are trying to put together a straddle where you buy a call and a put, each with strike $25. You have decided that the most you are willing to pay for the position is $5.90. You look into the limit order books for both options and see the following quotes in the market: Option Call Bid Ask $2.80 $3.30 Put $2.55 $3.00 Assume that the quantities trading in the options are sufficiently large to fill your order.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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3. You are trying to put together a straddle where you buy a call and a put, each with strike $25. You have decided that the most you are willing to pay for the position is $5.90. You look into the limit order books for both options and see the following quotes in the market: Option Bid Ask $2.80 $3.30 $2.55 $3.00 Call Put Assume that the quantities trading in the options are sufficiently large to fill your order. 1 (a) Suppose that you bought the call using a market order, what would you be willing to buy the put for? (b) Suppose that you bought the put using a market order, what would you be willing to buy the call for? (c) If you place these two limit orders in the market, what will the limit order book look like? Hint: the Bid and Ask will change if your limit orders are more competitive than the rest of the market. (d) Assume that no market orders arrive, but a new sell limit order arrives, so that the the ask price on the call falls to $3.20. How will you change your limit orders? What will the limit order book look like now?
Transcribed Image Text:3. You are trying to put together a straddle where you buy a call and a put, each with strike $25. You have decided that the most you are willing to pay for the position is $5.90. You look into the limit order books for both options and see the following quotes in the market: Option Bid Ask $2.80 $3.30 $2.55 $3.00 Call Put Assume that the quantities trading in the options are sufficiently large to fill your order. 1 (a) Suppose that you bought the call using a market order, what would you be willing to buy the put for? (b) Suppose that you bought the put using a market order, what would you be willing to buy the call for? (c) If you place these two limit orders in the market, what will the limit order book look like? Hint: the Bid and Ask will change if your limit orders are more competitive than the rest of the market. (d) Assume that no market orders arrive, but a new sell limit order arrives, so that the the ask price on the call falls to $3.20. How will you change your limit orders? What will the limit order book look like now?
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