Bullish

Long Straddle

Long Straddle

Components

Buy one call option and buy one put option at the same strike price.

Risk / Reward

Maximum Loss: Limited to the total premium paid for the call and put options.

Maximum Gain: Unlimited as the market moves in either direction.

Characteristics

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:
Risk Conversion Option Strategy

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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