CFA Level I · CFA Level I Exam · Pricing and Valuation of Options
A portfolio manager holds a long position in a call option and a long position in a put option with the same strike and expiration on the same underlying (a straddle). All else equal, the position is most likely to have:
A long straddle has positive gamma and negative theta. Holding long calls and puts gives convexity that benefits from large price moves, but the time value of both options decays as expiration nears, which costs the holder.
- Apositive gamma and negative theta.Correct
- Bnegative gamma and positive theta.
- Cpositive gamma and positive theta.
Explanation
Long options of either type have positive gamma because delta moves in favor of the holder as the underlying moves. Long options lose time value as expiration approaches, so theta is negative. The other choices describe short option positions or an impossible mix.
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