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What is Straddle Option Strategy?

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Straddle is an options strategy where the investors buy and sell a put and a call option simultaneously. The type of underlying, expiry date, and strike prices remain the same for the straddle strategy to work. The investors who use the straddle strategy expect something drastic in the market to happen in the future but are unsure whether this will lead to the markets to go up or down.

Types of Straddle Options

Straddle options can be of two types −

  • Long Straddle

  • Short Straddle

Long Straddle

In a long straddle options strategy, the investor buys both a long call and a long put option with the same price, expiration date, and strike price. This strategy helps the investors who trade in volatile markets and where it is unpredictable whether the market movements will let the price of the share go up or it will let the price come down.

The trader of a long straddle option knows that something strong will hit the markets in near future but is unable to find the direction of the movement of the market. Therefore, he buys a long call and long put at the same time that provides him some profit or at the best saves him from enormous loss.

Timing of Long Straddle

The trader having a long straddle must be aware of the market movements and apply the strategy at the right and opportune moment.

  • Having a long straddle is the best way to earn money when the option is at the money. In such circumstances, the investor will earn from the call option, letting the put option expire.

  • When the markets are down, he can use the put option and let the call option expire.

In both cases, the investor will earn a premium and will profit from the deal.

Short Straddle

In a short straddle option strategy, the investor buys both a short call and a short put option. It also acts like a long straddle options strategy when the market movements are unpredictable. In short straddle too, the expiry date, the strike price, and the underlying assets are the same. For a short straddle option strategy to work, the market must be the least volatile and there should not be price change movements for the stocks underlying the put and call options.

The investor can earn premiums by writing put and call options in a stable market that does not change too frequently. However, there are huge risks involved with a short straddle strategy if the market is volatile or significantly unpredictable.

Timing of Short Straddle Strategy

Like a long straddle, the traders of short straddle must also be aware of the markets to earn profits from the short straddle strategy. Usually, the best situation for a short straddle strategy to work is at the money (ATM) when the market is stable and volatility is at its least. This is the time to write a call and put option to maximize the returns.

raja
Probir Banerjee
Updated on 04-Oct-2021 12:45:29

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