Option Combinations

Question 1

Straddle

Answer 1

A call and a put that have the same strike price and expiration

Question 2

What would a customer buy a straddle?

Answer 2

If the customer believes the market will move sharply but doesn’t know which direction

Question 3

When would a customer sell a straddle?

Answer 3

If they believe the market will stay the same; very unpopular since if the market moves at all it will have very high risk

Question 4

What is a combination?

Answer 4

A straddle but with a different strike price or expiration

Question 5

What is a spread?

Answer 5

Purchase and sale of a call or purchase and sale of a put at different strike prices or expirations

Question 6

What is the purpose of buying a spread?

Answer 6

Allows a customer to offset the cost of an option; something of a hedging strategy. Good for when the movement of the market is expected to be in one direction but not a big movement