You hold a straddle on a stock that you bought a month ago and that still has two months to expiry. Assume the options are European. An unexpected increase of $1 in the price of the stock
A) Will increase the value of your straddle.
B) Will decrease the value of your straddle.
C) Will have no effect on the value of your straddle.
D) Can increase, decrease, or leave unchanged the value of the straddle.

Question

Quizplus · Accepted Answer

The payoff of a straddle depends on the difference between the market price and the strike price of the options. An unexpected increase in the stock price will increase the value of the call option and decrease the value of the put option. The overall effect on the straddle will depend on the magnitude of these changes and the initial prices of the options. Therefore, the value of the straddle can increase, decrease, or remain unchanged, making option D the correct choice.

You Hold a Straddle on a Stock That You Bought