Skip to content

FRM Part I · FRM Exam Part I · Trading Strategies

A trader holds a long straddle on a stock and now believes volatility will stay high but wants to cut upfront cost by giving up some profit for moderate moves. Which modification achieves this using a strangle with the same expiry?

Switching to a long strangle with out-of-the-money put and call lowers the upfront premium, while requiring a larger price move to profit. This retains the long-volatility view at reduced cost, unlike a short strangle, which profits from low volatility.

  1. AReplace the straddle with a long strangle using an out-of-the-money put and an out-of-the-money callCorrect
  2. BReplace the straddle with a short strangle using out-of-the-money options
  3. CAdd a long position in the stock to the straddle
  4. DReplace the straddle with a bottom vertical combination

Explanation

A long strangle uses out-of-the-money options, which cost less than at-the-money options, so the premium is lower. The price must move further to profit, so moderate moves yield less. A short strangle would bring in premium but expose the trader to large losses and does not express the view.

Did you get it right without looking?

One question tells you little. A timed set on Trading Strategies shows your real accuracy, how long you take and where you lose marks.

Practise Trading StrategiesFree diagnostic mock

More Trading Strategies questions