Long Straddle – Definition
Long Straddle is the purchase of both a call and put option which share a common strike price and expiry month and usually placed at-the-money.
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Maxium Profit
Profit potential is unlimited
Maximum Loss
Loss is limited to premium paid for a call option and a put option.
Break Even Point
Two break even points at expiration
The strike plus premium paid and the strike minus premium paid.
Long Straddle Example
Stock is at $ 201
Buy 1 (contract) , Jan 200 Strike Call for $ 5.20
Buy 1 (contract) , Jan 200 Strike Put for $ 4.08
Buying the call for $5.20 and the put for $4.08 results in a long straddle position that costa $ 9.28 per share or $ 928 per contract ( $9.28 per share x100 share per contract)
When to use this strategy
- Earnings are approaching.
Also see related Strategy, convoluted spread
- The market is at a large support or resistance number
Short Straddle – Definition
Short Straddle is the sale of both a call and put option which share a common strike price and expiry month and usually placed at-the-money.
Short Straddle Example
Stock is at $ 201
Sell 1 (contract) , Jan 200 Strike Call for $ 5.20
Sell 1 (contract) , Jan 200 Strike Put for $ 4.08
