You Hold a Straddle on a Stock That You Bought

question 3

Multiple Choice

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) Changes the value of your straddle by more than $1.
• B) Changes the value of your straddle by at most $1.
• C) Leaves the value of your straddle unchanged.
• D) Any of the above can happen.

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Definitions:

Sharpe Measure

A measure of the excess return (or risk premium) per unit of risk in an investment asset or a trading strategy, calculated as the difference between the asset's returns and the risk-free rate, divided by the asset's standard deviation.

Forecasting Ability

The capability to predict future trends, prices, or outcomes based on historical data, trends, and analysis.

Tracking Error

The difference between the return on a managed portfolio and that of a benchmark portfolio against which the manager is evaluated.

Benchmark Return

The standard against which the performance of a security, mutual fund, or investment manager can be measured.