Portfolio Management Practice Exam 2025 - Free Portfolio Manager Practice Questions and Study Guide

A long straddle options strategy involves buying both a call option and a put option with the same strike price and expiration date. This strategy is designed to profit from significant movement in the underlying asset's price, regardless of the direction of that movement. Therefore, it capitalizes on volatility in the market.

When an investor anticipates that a stock price will move significantly but is uncertain about the direction—whether it will rise sharply or fall significantly—the long straddle can be an effective approach. If the price moves substantially in either direction, the gains from one of the options (either the call or the put) can exceed the total costs of purchasing both options, leading to a profit. This makes the long straddle particularly ideal in volatile conditions where large price swings are expected.

In contrast, a strategy aimed at stable market conditions would not be suitable for a long straddle, as minimal price movement would typically lead to losses on both the call and put options. Likewise, specific market trends or consistent growth would not align with the fundamental purpose of a long straddle, which thrives on unpredictability and significant price changes.