CFA Level 3 | Derivatives: Straddle

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CFA Level 3
Topic: Derivatives and Currency Management
Reading: Options Strategies

What strategy do you use when you think the volatility of the underlying will be higher than the market perceives it to be but you have no opinion on the direction? It's the Straddle strategy!

A high cost strategy to implement but if the volatility is as high as your guess, then you will benefit from the payoff. If the volatility is low however, well, I wouldn't want to be in your shoes.

Check out the video on the calculations covered in the CFA Level 3 syllabus for the straddle strategy.

Do note that there are other variants of these volatility strategy, for example:

1) We could do a Strangle if we want to lower the cost of the strategy (buy a put option at a lower strike price and buy the call option at the higher strike price) but you would need a higher volatility to be able to profit. There really is no free lunch in this world.

2) Strip - Long the straddle and add on another long put option so you can magnify your returns if the price falls. Do this if you are leaning on the bearish side.

3) Strap - Add a call option to the straddle if you have a stronger feeling it will be bullish.

2) and 3) are leveraged though, so watch out!

Visit www.noesis.edu.sg/programme/cfa for more information on CFA Program prep courses offered by Noesis Exed (Noesis Academy)