FINC314 Lecture Notes - Lecture 29: Straddle, Premia
10 Feb 2020
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Document Summary
In the third exploratory note of the evening, i cover a couple of basic options strategies (mostly directional positions). In this exploratory note, we examine a slightly more advanced option strategy: the straddle. Further, we take a look at how straddles can be utilized to take directional bets on volatility without being overly exposed to movement in an underlying asset"s price. A straddle is an option strategy which involves buying (selling) both a call and a put with the same strike price and expiration date. With a long straddle, you make money if the underlying price changes significantly. With a short straddle, you make money if the underlying price does not change. Volatility is an important factor when it comes to option values: the higher the volatility, the more valuable the option and vice versa. Investors can, therefore, take directional bets on volatility simply by buying or selling options.
