A speculative trader believes that the S&P/TSX 60 Index will experience significant volatility but is uncertain about the direction. The current index level is 1,200. She wants to profit from a large move in either direction, with a capped risk. Which options strategy best suits this objective?

Question: A speculative trader believes that the S&P/TSX 60 Index will experience significant volatility but is uncertain about the direction. The current index level is 1,200. She wants to profit from a large move in either direction, with a capped risk. Which options strategy best suits this objective?

Answer options: ✅ Buying a straddle (buying both a call and a put with the same strike and expiry).

• Selling a strangle (selling an out-of-the-money call and an out-of-the-money put with the same expiry).
• Buying a bear put spread (buying a put with a higher strike and selling a put with a lower strike).
• Selling a covered call (selling a call against owned shares).

Correct answer: Buying a straddle (buying both a call and a put with the same strike and expiry).

Explanation: Buying a straddle involves buying both a call and a put option with the same strike price and expiration date. This strategy profits from large price movements in either direction, as the gain from one option will outweigh the cost of both options and the loss from the other option. The other strategies either cap potential profit, or are directional bets, or designed for income generation.