2012 Mock Q46

This one seems quite tricky. I understand the price of an option increases with E(vol) but still this question doesn’t quite make sense to me.

You have a butterfly, straddle & collar.

The answer says that the performance is dependant on the movement of the underlying in a collar whereas the other two are dependant on the E(vol). Can someone PLS explain how?


it is tricky, but main reason to use butterfly and straddle is you expect a lot of volatility

short butterfly - low vol, straddle high vol.

collar - irrespective of vol.

^^ agree with CPK

Ya the straddle and butterfly strategies fundamentally rely on some assumption about volatility. A collar isn’t really concerned with the level of volatility in terms of expected payoffs.