What is Straddle Option Strategy?
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.
Published on 04-Oct-2021 12:45:29
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