Option traders often refer to “straddles” and “butterflies.” Here is an example of each:
• Straddle: Buy call with exercise price of $100 and simultaneously buy put with exercise price of $100.
• Butterfly: Simultaneously buy one call with exercise price of $100, sell two calls with exercise price of $110, and buy one call with exercise price of $120.
Draw position diagrams for the straddle and butterfly, showing the payoffs from the investor’s net position. Each strategy is a bet on variability. Explain briefly the nature of each bet.
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