Straddle Options Strategy- Options strategies may appear complicated, but that’s because they provide you with a lot of flexibility in customizing your prospective returns and risks to your unique requirements. For example, if the market moves sharply enough, a method known as a straddle option can help you make money whether the market goes up or down.
A straddle option is a neutral strategy in which you buy a call and a put option on the same underlying stock with the same expiration date and strike price simultaneously. Your profit potential is limitless as long as the underlying stock moves sharply enough.
So, in today’s blog, we will discuss the long and short straddle options strategies:
What is Straddle Options Strategy?
A straddle is a neutral options strategy in which a trader buys and sells a put option and a call option with the same underlying security, strike price, and expiration date simultaneously.
When investors expect a substantial change in share price but can’t predict whether it will go up or down, they utilize the straddle strategy. Now that you’ve grasped the meaning let’s talk about the type of straddle.
What is Long Straddle Options Strategy?
A long straddle is one of the most straightforward market-neutral strategies to deploy. The P&L is unaffected by the direction in which the market moves once it is implemented. The market can go in any direction, but it must move in some direction. A positive P&L is created as long as the market moves (regardless of direction).
How does it work?
1. Outlook
One should have a neutral view of the stock or the index.
2. Strategy
To implement a long straddle, all one has to do is –
- Buy a Call option
- Buy a Put option
Ensure –
- Both the options belong to the same underlying
- Both the options belong to the same expiry
- Belong to the same strike
Nifty Spot – 15300
Long Straddle trade set-up –
- Buy 15300 CE by paying Rs.283.45
- Buy 15300 PE by paying Rs.274.9
3. Maximum loss\risk
The maximum loss for the long straddle strategy is limited to the net premium paid. It happens the price of underlying is equal to the strike price of options.
Maximum Loss = Net Premium Paid
4. Profit
This method has a limitless profit potential regardless of the underlying direction. For example, profit is realised when the underlying price is higher than a long Put’s strike price or lower than a long Call’s strike price.
5. Breakeven stock price at expiration
A straddle has two breakeven points.
- Lower Breakeven = Strike Price of Put – Net Premium
- Upper breakeven = Strike Price of Call + Net Premium
6. Payoff Diagram
Below is the payoff diagram for the above strategy-
You can also read our blog on 12 Common Option Trading Strategies Every Trader Should Know
What is Short Straddle Options Strategy?
A short straddle is a strategy in which you sell both a call and a put option with the same strike price and expiration date. When a trader believes the underlying asset will not move much higher or lower over the life of the options contracts, they will adopt this strategy.
How does it work?
1. Outlook
One should have a neutral view of the stock or the index.
2. Strategy
To implement a short straddle, all one has to do is –
- Sell a Call option
- Sell a Put option
Watch our webinar on Trade Index with Straddles
Ensure –
- Both the options belong to the same underlying
- Both the options belong to the same expiry
- Belong to the same strike
Nifty Spot – 15300
Long Straddle trade set-up –
- Sell 15300 CE by paying Rs.284.15
- Sell 15300 PE by paying Rs.271.4
3. Maximum loss\risk
Your losses might theoretically be limitless if the stock rises.
Your losses will be restricted to the strike price minus the net credit gained for selling the straddle if the stock falls.
4. Profit
The profit that can be made is restricted to the net credit earned for selling the call and put.
You can also join our course on Advanced Options Strategies
5. Breakeven stock price at expiration
There are two breakeven points:
- Strike A minus the net credit received.
- Strike A plus the net credit received.
6. Payoff Diagram
Below is the payoff diagram of this strategy
Bottomline
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Happy Investing!
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