if you expect significant fluctuation in price of a stock in next few days, but do...
if you expect significant fluctuation in price of a stock in next few days, but do not know whether it will go up or down, which of the following would be the appropiate option strategy in this scenario?
a. Calendar spread
b. Straddle
c. Protective Put
d. Covered Call
Homework Answers
Answer is b. Straddle.
Straddle is a combination of a long put and call option and the underlying asset. Straddle is formed when a market or a stock is very volatile but we don't know in which direction it will go.
Long put will hedge the downside risk i.e. market or stock going down and long call will provide upside gain in case market goes up. however this strategy is expensive because we need to pay upfront premium to purchase both put and call option.
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