Buy one call option and buy one put option at the same strike price.
Maximum Loss: Limited to the total premium paid for the call and put options.
Maximum Gain: Unlimited as the market moves in either direction.
When to use: When you are bullish on volatility but are unsure of market direction.
A long straddle is an excellent strategy to use when you think the market is going to move but don't know which way. A long straddle is like placing an each-way bet on price action: you make money if the market goes up or down.
But, the market must move enough in either direction to cover the cost of buying both options.
Buying straddles is best when implied volatility is low or you expect the market to make a substantial move before the expiration date - for example, before an earnings announcement.
Comments (31)
Peter
November 13th, 2011 at 6:33pm
Hi Josh,
Increasing time has the effect of higher option prices. So a straddle with a longer maturity will mean it is more expensive and hence wider breakeven points. Conversely, a shorter time frame will make the straddle cheaper and closer breakeven points.
Typically, the effect of time decay begins to decrease fastest when the options are < 30 days to expiry.
joshua
November 11th, 2011 at 5:19pm
in your graph you have time +60. how does a longer or shorter expiration affect the straddle. when does time decay begin to show significant loses if the underlying has not moved?
Peter
November 9th, 2011 at 6:39pm
This strategy is call a Risk Conversion.
Click to enlarge:
To answer your questions;
a) Risk Conversion
b) Unlimited
c) $130.10 d) This strategy is very bullish, so not suited to markets that trade sideways alot. If you're view of the market is neutral you might sell straddles or strangles.
Paresh
November 7th, 2011 at 8:42am
120 strike put @ 3.85 and 130 strike call @ 2.80
Peter
November 7th, 2011 at 4:28am
Calls or puts?
Paresh
November 6th, 2011 at 5:42am
Hi
I am short on Sterlite Industries 120 strike price @ 3.85 and at the same time long at 130 strike price @ 2.8. Current Market Price of Sterilite is 123/-
a) What is this strategy called?
b) What will be by max gain / loss?
c) What will be my break even?
d) Is this the correct strategy in current market scenario where market is up on one day and down on next day?
Peter
July 26th, 2011 at 8:03pm
No, you would need to buy the OTM put options for it to be a strangle. Buying the calls and selling the puts resembles a synthetic - but with different strike prices it has the same profile as a long collar.
reza
July 26th, 2011 at 7:21pm
Hi,
can you tell me if I bought calls OTM of XYZ stock and then sold OTM of XYZ put options, is this called strangle and when would you make such trade strategy?
Peter
July 18th, 2011 at 4:28pm
That's called buying a strangle.
Naga
July 18th, 2011 at 11:42am
Hello...
Please tell me what is this strategy called???
Ex.. buying 5400 put one lot, buying 5600 call one lot in nifty (present rate of nifty future is 5500)
Peter
May 3rd, 2011 at 5:46pm
Hi Manish,
First - by its definition a Straddle must have the same strike for call and put. ATM is the best selection because it gives the position the greatest chance of success as the underlying can move either way to profit.
Second - a Strangle that uses ITM options is called a Long/Short Guts. You can use ITM calls and puts for sure...the premiums will be higher though and so will your break-even points.
Manish Meena
May 3rd, 2011 at 1:32am
Hey peter,
First of all thanks for these awesome site on options. :)
I have a query regarding strangle v/s straddle.
In Long/short strangle you have suggested OTM call and put. while for long/short straddle you have suggested ATM call and put. What is the rational behind this.
If I create a strangle with ITM call and ITM put what would be the chances I get good return compare to OTM call and OTM put.
Thanks in advance
Peter
March 17th, 2011 at 4:39pm
The magenta line shows what the theoretical P&L of the strategy is with 60 days left until the options expire.
D.Thirupathi
March 17th, 2011 at 11:26am
HI sir
I could not understand the Megenta line that P$L + 60 days. i want join with you pl.give me details . mail to [email removed]
Peter
February 23rd, 2011 at 3:48pm
Yes, you would want the straddle to be ATM. If you chose an ITM call and OTM put then the position would have a large long delta position, which means a strong upwards bias.
Straddles are generally viewed as market neutral i.e. you don't have ma directional view and wish to profit if the market moves in either direction. Hence ATM options are best.
Bill
February 23rd, 2011 at 5:08am
Hi Peter,
Is the straddle works better with a strike price near or ATM? At the strike both Call and Put would be near or ATM, but if we choose the strike price to be deep ITM for the Call, it would be very much OTM for the Put which in turn would have very low delta. Thanks!
Peter
November 26th, 2010 at 8:23pm
It depends on how much profit you are willing to take and your view of the market. If you've doubled your money but you think the stock can still go higher then you would hold onto the trade in the hope it will make you more - otherwise you would sell out of the option spread and cash in your profits.
MD
November 25th, 2010 at 10:51pm
Hi Peter,
How can we decide the exit time in this strategy. At last date of options both values (call/put) are at lower point. Can you suggest any method to decide when to sell more profitable option.
Regards,
Peter
November 10th, 2010 at 5:55am
Time affects both calls and puts in the same way - i.e. an increase in time increases the value of call and put options and vice versa for decreases in time to expiration. You might be confused between time to expiration and underlying price?
Philip
November 10th, 2010 at 4:46am
Thank you Peter. Clarifying further, in specific why does the put option value move in both ways with regards to the time to expiration while call option value will only increase as time to expiration is longer?
Peter
November 10th, 2010 at 3:54am
Depends on the option. ATM options are very sensitive closer to expiration, however, deep OTM options will not move much at all when the stock price changes. But those same deep OTM options that have a longer expiration date will have more delta and hence change in value more than their closer to expiration counterparts.
Philip
November 10th, 2010 at 3:41am
It seems that profits for holding till expiration surpasses that for a shorter holding period when stock prices are very low or high. Shouldn't a shorter holding period have an advantage at all times since there is a time value to it?
Peter
October 3rd, 2010 at 9:11pm
Up to you Haroon, which I guess depends on your expected profits from the trade and view of the market.
Haroon Basha
October 3rd, 2010 at 6:20pm
Hello Sir,
What is the opportune time to exit from this strategy (Long Straddle)?
Peter
September 29th, 2010 at 6:11pm
I would guess that a straddle was named as such because the shape of a short straddle resembles the legs of a horse rider as they "straddle" a horse???
Phil
September 29th, 2010 at 2:39am
Hi,
does anyone know the origin of the terms straddle and strangle in this context. I'm confused because stangle suggests to me maybe a higher risk-return chance and straddle implies a gap between something (strike-prices) which is not the case.
I would appreciate your thoughts on the matter, I'm not a native speaker...
Peter
August 30th, 2010 at 6:26pm
You can exit the position any time - provided there is enough liquidity of course.
jignesh
August 30th, 2010 at 2:04pm
is this necesry to remain in this strategy till expiry? or one can exit before?
monu jnu
July 18th, 2009 at 5:24am
i hope this strategie is always good for volitile market u can play in blind because u r making unlimited money with limited lose in any condition of market
Sandeep
December 9th, 2008 at 10:51am
Hi Jitin,
What are you looking for exactly?
JITIN
December 8th, 2008 at 2:53am
PLZ CAN ANY BODY TELL ME HOW TO THE SAME
jitin.thukral@gmail.com
9899418696
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