10. Option combinations (S21-2) Option traders often refer to “straddles” and “butterflies.”

Here is an example of each:

• Straddle: Buy one call with exercise price of $100 and simultaneously buy one put with exercise price of $100.

• Butterfly: Simultaneously buy one call with exercise price of $100, sell two calls with exercise price of $110, and buy one call with exercise price of $120.

Draw payoff diagrams for the straddle and butterfly, showing the payoffs from the investor’s net position. Each strategy is a bet on variability. Explain briefly the nature of each bet.