Series 7 practice questionmediumOptions — Strangles
Compared to a long straddle, a long strangle has which of the following characteristics?
- ALower initial cost but requires a larger move to profit✓ Correct answer
- BHigher initial cost and requires a larger move to profit
- CLower initial cost and requires a smaller move to profit
- DSame cost but different risk profile
Explanation
Why A — Lower initial cost but requires a larger move to profit
A long strangle is cheaper than a long straddle because both options are out-of-the-money. However, the stock must move further to reach profitability because the breakeven points are farther apart. The tradeoff is lower cost for a lower probability of profit.
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