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Preferred direction for a strangle bought below both strikes

Question

A stock is at 22. You buy a strangle made of a put struck at 33 and a call struck at 55. Which way would you like the stock to move next: answer 11 for up, −1-1 for down, 00 for staying put.

Short answer

−1-1 (down). With the stock below the put strike, the position is dominated by the in-the-money put and has negative delta, so a fall increases its value.

Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.

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