FRM Part I · FRM Exam Part I · Trading Strategies
Compared with a long straddle on the same underlying, a long call butterfly spread is best described as which of the following?
A long call butterfly has a loss limited to the net premium paid and profits when the price finishes near the middle strike. It suits a view of low volatility, whereas a long straddle profits from large moves.
- AA position that profits from large price moves in either direction, with unlimited upside
- BA position with limited loss equal to the net premium that profits if the price stays near the middle strikeCorrect
- CA position with unlimited loss if the price stays near the middle strike
- DA position that profits only if the price rises above the highest strike
Explanation
A long butterfly costs a net premium, which is the maximum loss, and has its peak payoff at the middle strike. A long straddle is the opposite, profiting from large moves. The butterfly is suited to low expected volatility.
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