FINRA Series 7Investment Information and Suitable RecommendationsEasy
A technician observes that ABC stock has been trading in a narrow range between $48 and $52 for several weeks. The technician anticipates a significant price movement but is unsure of the direction. Which options strategy would be most appropriate for this scenario?
- ABull Call Spread
- BLong Straddle
- CShort Straddle
- DCovered Call
Show answer & explanationAnswer & explanation
Correct answer: B. Long Straddle
A long straddle involves buying both a call and a put with the same strike price and expiration date. This strategy profits from a significant price movement in either direction, which aligns with the technician's expectation of volatility without a clear directional bias.
Why the other options are wrong
- A. A bull call spread is a moderately bullish strategy, indicating a directional bias, which the technician does not have.
- C. A short straddle profits from a stable price, which is opposite to the technician's expectation.
- D. A covered call is a moderately bullish strategy, not suitable for anticipated volatility in either direction.
Long Straddle
An options strategy involving buying both a call and a put option on the same underlying asset with the same strike price and expiration date.
- Profits from significant price movement in either direction.
- Used when volatility is expected but direction is uncertain.
- Maximum loss is the total premiums paid.
Memory trick: A long straddle is like buying tickets for both the up and down rollercoaster, hoping for a wild ride.