Straddle Options Strategy

The Straddle is a neutral options strategy designed to profit from significant price movements in either direction. It involves buying both a call and a put option with the same strike price and expiration date. Traders use straddles when they expect volatility but are uncertain about the direction of the move.

Structure

• Long Straddle: Buy 1 call + Buy 1 put (same strike & expiry)
• Short Straddle: Sell 1 call + Sell 1 put (same strike & expiry)

Profit & Loss Profile

• Long Straddle: Unlimited profit potential; max loss = total premium paid
• Short Straddle: Limited profit (premium received); unlimited risk if price moves sharply
• Breakeven Points: Strike ± total premium

Ideal Market Conditions

• Use long straddle when expecting high volatility (e.g., earnings reports)
• Use short straddle in stable, low-volatility environments

Example

A stock is trading at $100. You buy:

• 1 call option at $100 strike for $3
• 1 put option at $100 strike for $2

Total cost = $5. Breakeven = $105 (upside) and $95 (downside). Profit occurs if the stock moves beyond either breakeven point.

Risks & Considerations

• Time decay erodes value of long straddles
• Short straddles carry assignment risk and require margin
• Volatility forecasts are critical to success