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Option Straddle The Best Strategy When You Can’t Tell The Market Direction

Option straddle is a market neutral strategy

15Option straddle is a market neutral strategy where one holds a position in a call and put of the same strike price simultaneously. One can choose to go for a long straddle or a SteadyOptions Greeks Option . In a long straddle one buys a call and a put of the same strike price. The strategy pays off if the price moves strongly in either direction. The maximum possible loss in a straddle is the price of the straddle which equals the premium of the call + the premium of the put. The maximum possible profit is unlimited. A short straddle is the reverse of a long straddle and one sells the call and put of the same strike price. The maximum possible profit is capped at the premium of the call + premium of the put but the maximum possible loss is unlimited.

Long Option Straddle

When to opt for a long option straddle You should Visit SteadyOptions for a long straddle when you expect the price of the underlying to move significantly, in either direction. For example, suppose ABC corporation is coming out with its quarterly earnings tomorrow. You expect the numbers to be very bad or very good and hence expect that the price of ABC corp will move for sure, but aren’t sure of the direction. In this situation, you should buy the straddle. If the price of the stock moves up, the put will lose value but the call will gain in value. If the price of the stock falls down, the call will fall in value but the put will gain in value. However, since the quarterly earnings are an anticipated event, the market will price the options higher before the event. If the movement in price is small there will not be any profit When to opt for a short option straddle A short straddle should be bought when the implied volatility is high and you expect it to fall or when you expect the price to be range bound. If the price does not move, time decay and decrease in implied volatility will cause the price of both the call and the put to erode, leading to a net gain.

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