Straddle
IntermediateA straddle is an options strategy that involves buying both a call and a put on the same asset, with the same strike price and expiry date, to profit from a large price move in either direction.
A straddle is used when an investor expects a big price movement but is unsure of the direction. If the price rises sharply, the call gains value. If it falls sharply, the put gains value.
For example, with a share trading at 100, an investor buys a call with a strike of 100 for 5 and a put with a strike of 100 for 4, a total cost of 9. At expiry, the investor profits if the share is above 109 or below 91. If the share rises to 120, the call is worth 20 and the put expires worthless, giving a profit of 11. If the share stays at 100, both options expire worthless and the investor loses the full 9.
Straddles are often used around events that could cause large price swings, such as earnings announcements, regulatory decisions or product launches.
The main risk is that the price does not move enough to cover the combined premium, which can be expensive. Selling a straddle is the opposite bet, earning premiums if the price stays stable, but with potentially large losses if it moves sharply.
For worked examples and full lessons, visit notesbysara.org.