Strangle

    graph LR
	    A(Strangle Strategy) -->|Call Option| B[Strike Price Above]
	    A -->|Put Option| C[Strike Price Below]
	    B --> D[Profitable when price rises significantly]
	    C --> E[Profitable when price drops significantly]

## What is the main purpose of using a strangle? - [x] To profit from significant price movements regardless of direction - [ ] To consistently earn small profits on favorable movements - [ ] To hedge against losses in a static market - [ ] To utilize only one option type for simplicity > **Explanation:** A strangle is designed to profit from large price movements, no matter whether the price goes up or down. ## How does the premium of a strangle compare to a straddle? - [x] Typically lower - [ ] Typically higher - [ ] Same amount - [ ] Only premiums for puts are lower > **Explanation:** Strangles generally have lower premiums than straddles since they involve different strike prices. ## What is a requirement for a profitable strangle? - [ ] Moderate market movements - [x] Significant price swings - [ ] Stability in underlying asset price - [ ] Daily trading > **Explanation:** For a strangle to be profitable, the underlying asset must exhibit a significant price move beyond the cost of the options. ## Can you use a strangle for short-term trading? - [x] Yes, especially around volatile events - [ ] No, it works only for long-term investments - [ ] It's too risky for short-term strategies - [ ] Only in bull markets > **Explanation:** Strangles can be effectively used in short-term trading strategies, especially during events that may cause volatile price swings. ## What happens if neither option is exercised at expiration? - [ ] Transferred to luxury cars - [ ] Profit from premiums - [x] Both options expire worthless and lose the premiums paid - [ ] Investor automatically buys shares > **Explanation:** If neither option is exercised by expiration, the options expire worthless and the investor loses the total premiums spent. ## Which of the following describes a strangle better? - [x] Hold both a call and a put with different strike prices - [ ] Hold only long puts - [ ] Hold long calls and bonds - [ ] Diversify between stocks and options > **Explanation:** A strangle involves a call and a put option on the same asset with different strike prices, allowing flexibility in trading. ## What type of investor might choose to use a strangle? - [ ] Conservative investor only - [ ] One avoiding risk at all costs - [x] An investor anticipating significant price movement but unsure of direction - [ ] Primarily those seeking guaranteed returns > **Explanation:** The strangle strategy is suitable for those expecting volatility and uncertain direction, allowing them to profit from large market shifts. ## Does the strike price for a call option in a strangle need to be higher than the put option? - [x] Yes, typically - [ ] No, they can be the same - [ ] Not always, it depends on market research - [ ] It's irrelevant to profitability > **Explanation:** Yes, in a strangle, a call option's strike price is usually higher than the put option's strike price, capturing upward movement. ## To benefit from a strangle, the asset price must move… - [x] Beyond both strike prices - [ ] Remain within a narrow range - [ ] Be above the call price only - [ ] Be below the put option only > **Explanation:** To profit from a strangle, the asset price must move significantly beyond both strike prices – in either direction! ## What is the maximum loss in a strangle scenario? - [x] Total premiums paid for both options - [ ] No loss; it carries no risk - [ ] Unlimited - [ ] Twice the initial investments > **Explanation:** The total loss is limited to the amount spent on the premiums for both options, making it a defined-risk strategy.