Question

Suppose you expect the volatility is high and is uncertain about the price movement of the underlying, which of the following is your best strategy?

A. Long put
B. Long butterfly spreads
C. Long call
D. Long straddle

Answer 1

According to me Long straddle is the best strategy. Because as per the information the price movement of the stock is uncertain and the volatility is high. And as per the strategy I buy 1 long call and 1 long put at the same strike price. In this case the cost will be limited to the premiums paid but the gain will be unlimited.

If the price goes beyond the strike price then I will only subscribe the long call option. In that case I buy the stock at strike price and sell the stock at spot price in the market and the difference will be my profit after deducting the premiums paid.

On the other hand if the stock price goes below the strike price then I will only subscribe the long put option. Here I sell the stock at strike price by buying the stock at spot price from the market. Again the difference will be my profit after deducting the premiums paid.