What type of investors usually utilize a straddle strategy?

What type of investors usually utilize a straddle strategy?

• A. Investors who expect low volatility
• B. Investors who expect high volatility
• C. Investors solely focused on dividend income
• D. Investors who want to minimize transaction costs

Answer: (B)

A straddle strategy is primarily utilized by investors who expect high volatility in the price of an underlying asset. This strategy involves purchasing both a call option and a put option at the same strike price and expiration date. The reasoning behind this approach is that if the price of the asset moves significantly in either direction—up or down—the investor stands to profit from one of the options while potentially incurring a loss on the other. The goal is to capitalize on the anticipated price movement. Investors who anticipate low volatility are less likely to choose a straddle, as the options may expire worthless if the price of the underlying asset does not move significantly. Similarly, those focused solely on dividend income would not find relevance in a straddle strategy, as it is not related to earning dividends but rather to capitalizing on price movements. Lastly, minimizing transaction costs does not align with the straddle strategy either, as entering into multiple option contracts can lead to higher overall transaction costs. Thus, the correct answer highlights the investor's expectation of high volatility being the key driver for employing a straddle strategy.

A straddle strategy is primarily utilized by investors who expect high volatility in the price of an underlying asset. This strategy involves purchasing both a call option and a put option at the same strike price and expiration date. The reasoning behind this approach is that if the price of the asset moves significantly in either direction—up or down—the investor stands to profit from one of the options while potentially incurring a loss on the other. The goal is to capitalize on the anticipated price movement.

Investors who anticipate low volatility are less likely to choose a straddle, as the options may expire worthless if the price of the underlying asset does not move significantly. Similarly, those focused solely on dividend income would not find relevance in a straddle strategy, as it is not related to earning dividends but rather to capitalizing on price movements. Lastly, minimizing transaction costs does not align with the straddle strategy either, as entering into multiple option contracts can lead to higher overall transaction costs. Thus, the correct answer highlights the investor's expectation of high volatility being the key driver for employing a straddle strategy.