The moneyness of options.

I am preparing for Exam FM for June 2015 and I am following ASM Manual 11th ed. by Cherry and Gorvett.



I am having difficulty understanding the moneyness of the combinations of options. I understand the definitions of all three terms (which is on page 551, Chapter 14 of the Manual): at-the-money, in-the-money, and out-of-the-money.



Now, let's see the definition of Straddle: Buy both put and call with the same strike price. So, the payoff graph looks like V shaped. The writers did not explain (unless if I did not understand correctly) the nature of moneyness of the put and involving in the straddle. But when they define the Strange (p. 599) they said when we buy a straddle we need to use at-the-money options. I don't understand why this should be the case. And for strangle why we have to have out-of-the-money options?



One more confusion but is similar to the above is the Sample Problem 1 from the Financial Economics Portion which is:



"Determine which statement about zero-cost purchased collars is FALSE

(A) A zero-width, zero-cost collar can be created by setting both the put and call

strike prices at the forward price.

(B) There are an infinite number of zero-cost collars.

(C) The put option can be at-the-money.

(D) The call option can be at-the-money.

(E) The strike price on the put option must be at or below the forward price."



Here, I can detect very quick the choices A, B, E are true for a zero-cost collar. But again how do we argue the moneyness of the options with out knowing the current price and the strike price of the stock?



Thanks for the cooperation.

The moneyness of options.