Calzada asks for recommendations on option strategies to implement if the market is expected to trade in a narrow range in the near term. Dufu responds, “The appropriate strategy in this scenario depends on your expectations for changes in implied volatility. If you expect a decrease in implied volatility, then you should write a straddle on the stock index. If your expectation is for implied volatility to increase, then you should enter a short risk reversal trade on the stock index. If your view is that implied volatility will remain unchanged, then you should buy call options and write put options on the stock index.”
Question
In her response to Calzada, Dufu is most likely correct about:
a writing a straddle.
b a short risk reversal trade.
c buying calls and writing puts
Writing a straddle is the correct answer, because that is the strategy when you are expecting the volatility to decrease. Why is C incorrect? Thanks!