You are long an at-the-money straddle on a stock index. Which of the following statements is valid?
A) Your position increases in value if, ceteris paribus, the index rises.
B) Your position increases in value if, ceteris paribus, the index falls.
C) Your position increases in value if, ceteris paribus, the volatility of the index rises.
D) All of the above.

Question

Quizplus · Accepted Answer

A long at-the-money straddle involves buying both a call and a put option at the same strike price and expiration date. This strategy profits from significant movements in either direction in the underlying asset, as well as an increase in volatility. 
Option A is valid because if the index rises, the value of the call option increases, which offsets the loss on the put option. 
Option B is also valid because if the index falls, the value of the put option increases, which offsets the loss on the call option. 
Option C is valid because an increase in volatility usually leads to an increase in option prices, which would increase the value of both the call and put options in the straddle. 
Therefore, all of the above statements are true, and the correct answer is D.

You Are Long an At-The-Money Straddle on a Stock Index