ADMS 1000 Lecture Notes - Lecture 30: Call Option, Spot Contract

• School: York University
• Department: Administrative Studies
• Course: ADMS 1000
• Professor: Alan Shapiro

Document Summary

The call and put options used in a strangle can have different exercise prices, a long strangle can be constructed in a variety of ways. For example, a strangle could be constructed in which the call option has a higher exercise price than the put option and vice versa. The disadvantage of a strangle relative to a straddle is that the underlying currency has to fluctuate more prior to expiration. As with a long straddle, the reason for constructing a long strangle is the expectation of a substantial currency fluctuation in either direction prior to the expiration date. However, since the two options involved in a strangle have different exercise prices, the underlying currency has to fluctuate to a larger extent before the strangle is in the money at future spot prices. A strangle could be constructed in which the call option has a higher exercise price than the put option and vice versa.