Between long straddle and long strangle, which one should a trader choose when there is a...

Between long straddle and long strangle, which one should a trader choose when there is a volatility market?

Solutions

Expert Solution

Long Straddle :BUY one Call and BUY one put , For both the strike price =Current stock Price.(At the money)

This strategy will give payoff if the share price goes up or goes down from the current price.

Long Strangle :BUY one Call and BUY one put , For Call Strike price higher than current market price. For Put, Strike Price lower than current market price. Both out of the money

This strategy will give payoff if the share price goes up or goes down significantly

This strategy will cost less.

Payoff Diagrams are given below.

If the trader expects high volatility in the market , it should choose Long strangle , because cost will be lower.

ANSWER: Long Strangle

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A trader creates a long strangle with put options with a strike price of $160 per...

A trader creates a long strangle with put options with a strike price of $160 per share, and call options with a strike of $170 per share by trading a total of 30 option contracts (15 put contracts and 15 call contracts). Each contract is written on 100 shares of stock. The put option is worth $13 per share, and the call option is worth $11 per share. What is the value of the strangle at maturity as a function...

A trader creates a long strangle with put options with a strike price of $160 per...

A trader creates a long strangle with put options with a strike price of $160 per share, and call options with a strike of $170 per share by trading a total of 30 option contracts (15 put contracts and 15 call contracts). Each contract is written on 100 shares of stock. The put option is worth $13 per share, and the call option is worth $11 per share. A. What is the value of the strangle at maturity as a...

Suppose XYZ stock is trading at $40 per share. An options trader enters a long straddle...

Suppose XYZ stock is trading at $40 per share. An options trader enters a long straddle by buying a JUL 40 put for $200 and a JUL 40 call for $200. a) How much is the total investment the trader put into the straddle?b) What’s maximum loss the trader may have?c) If the stock in July trades at $30, what’s the profit on this trade?

What are long & short straddle, long & short strap, long & short strip? Differences between...

What are long & short straddle, long & short strap, long & short strip? Differences between and diagram for each.

Explain the differences between STRAP and straddle options trading strategdy and Why would an investor choose...

Explain the differences between STRAP and straddle options trading strategdy and Why would an investor choose one over the other? and give an example of each?

Question 2 Indicate six key differences between a deque and a vector. When should you choose...

Question 2 Indicate six key differences between a deque and a vector. When should you choose one over the other? Explain how a deque works internally by providing a thorough explanation of how the item insertion happens.

What is the difference between NPV and IRR? Which one would you choose for evaluating a...

What is the difference between NPV and IRR? Which one would you choose for evaluating a potential investment and why? Be sure to support your reasoning with evidence

What is the difference(s) between a chronological or functional resume? Which one did you choose and...

What is the difference(s) between a chronological or functional resume? Which one did you choose and why? What is the key component/s to an effective resume?

When should you choose a deque over a vector and a vector over a deque in...

When should you choose a deque over a vector and a vector over a deque in c++

Question #2: Which Should We Buy? Using the EAC approach, which machine should we choose? Use...

Question #2: Which Should We Buy? Using the EAC approach, which machine should we choose? Use the table below to plan your cash flows (Bold boxes are where #’s should be). Neither machine will have a differential impact on revenue. No change in NWC is required. The straight line depreciation rate is 20%, the required return is 10% and the tax rate is 40%. There is no salvage values for either machine. Machine A Machine B Initial Cost $150,000 $100,000...

Subjects