Preferred direction for a strangle bought below both strikes
Question
A stock is at . You buy a strangle made of a put struck at and a call struck at . Which way would you like the stock to move next: answer for up, for down, for staying put.
Short answer
(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.
See the hint and the full worked solution in the question bank (free account).
Open the worked solutionLessons behind this question
- Market Model and Risk-Neutral Valuation
- Option Mechanics: Calls, Puts, Moneyness, Intrinsic Value, and Exchange vs. OTC Markets
- Option Trading Strategies: Spreads, Combinations, and Payoff Engineering
Start with a free lesson: Options is part of a free topic. Create a free account, no card needed, to read it in full with worked solutions.
Read it free