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Answer: As the stock moves up or down, the strangle reaches breakeven “sooner” (requires less of an up/down in the asset price) than the straddle
A strangle is generally cheaper than a straddle because it uses out-of-the-money options, so the initial premium is lower. It also usually has lower maximum downside because less premium is paid. However, a strangle does not reach breakeven sooner than a straddle. In fact, because the strikes are farther out-of-the-money, the underlying price must move more before the strategy becomes profitable. That makes statement B the exception. The strategy still benefits from large moves in either direction, so it remains a volatility strategy with uncapped upside potential.
Author: Manit Arora
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Question 185.3. John predicts that Groupon’s stock (ticker: GRPN) is going to see big move, soon, in either direction: he thinks the stock should either spike up, or plummet, dramatically. He therefore predicts the stock will do anything except remain range-bound. His plan is to purchase straddles. His college Andrea argues for a STRANGLE instead. Her argument in favor of a strangle, over a straddle, employs each of the following EXCEPT:
A
The strangle has a lower initial investment (total premiums) than the straddle
B
As the stock moves up or down, the strangle reaches breakeven “sooner” (requires less of an up/down in the asset price) than the straddle
C
The strangle has less maximum downside (risk) than the straddle
D
The strangle retains two of the straddle’s advantages: it remains a volatility strategy with an uncapped payoff if the stock rises
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