Question

) Identify two different option strategies the investor can follow to take advantage of increasing market volatility (regardless of the direction of the move) and explain the differences among them. Why would an investor choose one over the other?

Answer 1

STRAP is a option strategy in which we will be trying to buy two long call and one long put and it will be helping us in order to take advantage of increased market volatility as when the market will be going up, it will be leading to increase in the volatility of the market and it will be leading to increase in the value of the call option as well as put option due to increase in the value of the volatility.

LONG STRADDLE will mean that we are buying a call option and put option of the same strike price of the similar stock of the similar maturity and we will be trying to play on the volatility because when volatility will be rising, it will mean that the value of the call option and put option will be rising and it will be helping us in order to maximize our rate of return because volatility generally have a very positive relationship with option as when the volatility will be rising the call option and put option value will be rising with the volatility because the probability of increase of achievability of their strike price increases.

There is difference between both the strategy because the long straddle will be chosen by the investor who is uncertain about the movement of the market and he is trying to you bet on either on upside or downside volatility, but strap will mean that the investor is more bullish as he has taken two call options in regard to just one put option, so he will be trying to increase his value through bullish movement and increase in the volatility on the upside.