Straddle option
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A straddle option is a type of options trading strategy where an investor buys both a call and a put option on the same underlying asset, with the same strike price and same expiration date.
It's designed to profit from large price movements in either direction—up or down—making it a favorite for traders expecting volatility but uncertain of direction.
📊 How a Straddle Works
| Component | Details |
|---|---|
| Call Option | Right to buy at strike price |
| Put Option | Right to sell at strike price |
| Same Strike | E.g., both at $100 |
| Same Expiry | E.g., both expire in 1 week |
You profit if the asset moves significantly above or below the strike price—enough to offset the cost of both premiums.
🧾 Example
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Stock XYZ = $100
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Buy 1 Call at $100 = $3 premium
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Buy 1 Put at $100 = $4 premium
-
Total Cost = $7
To profit, XYZ must move:
-
Above $107 (strike + combined premium)
-
Below $93 (strike – combined premium)
If XYZ stays around $100 → the straddle expires worthless → max loss = $7
🟢 When to Use a Straddle
| Ideal When | Why |
|---|---|
| Big move expected | Earnings, Fed meetings, product launches |
| Uncertainty in direction | Don't know if the stock will go up or down, just that it will move |
| Volatility trades | Expecting higher-than-priced-in volatility in the option premiums |
🔴 Risks of a Straddle
| Risk | Explanation |
|---|---|
| High Premium Cost | You're buying two options, so break-even range is wide |
| Time Decay (Theta) | Value erodes quickly if the stock stays near strike price |
| Implied Volatility Crush | After major events, premiums often fall, hurting the position |
🧠 Summary
A straddle is a non-directional, high-volatility strategy. You're betting that something big will happen—but you don't care if it’s good or bad. The only requirement: the asset must move enough to cover the cost of both options.
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