An investor expects stock prices to move either sharply up or down.

An investor expects stock prices to move either sharply up or down.

His preferred strategy should be to:
A . buy a butterfly spread
B . buy a condor
C . buy a collar
D . buy a straddle

View Answer

Answer: D

Explanation:

Straddles and strangles are strategies that would benefit from sharp movement in option prices, regardless of direction. These comprise a long call and a long put, which would benefit regardless of whether prices rise or fall. The only time they would lose money would be when prices stay constant.

A collar would gain when stock prices fall, and not when they rise. Since our investor does not have a view on the direction of the movement, this strategy will not work for him.

A butterfly spread or a condor would gain when prices stay range-bound, so that cannot be a useful strategy.

Therefore Choice ‘d’ is the correct answer.