Question

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

Answer 1

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