Long Straddle
| B/S | Strike | Type | Price |
|---|---|---|---|
| Buy 1 ATM | $40 | Call | $1.14 |
| Buy 1 ATM | $40 | Put | $1.14 |
| Net Debit | $228 | ||
A long straddle is where you buy both a call and a put at the same strike price in the same expiration month.
The Max Loss is limited to the total premium paid for the call and put options.
The Max Gain is uncapped as the market moves in either direction.
Characteristics
When to use: When you are bullish on volatility but are unsure of market direction.
A long straddle is an excellent strategy to use when you think the market is going to move but don't know which way. A long straddle is like placing an each-way bet on price action: you make money if the market goes up or down.
But, the market must move enough in either direction to cover the cost of buying both options.
Buying straddles is best when implied volatility is low or you expect the market to make a substantial move before the expiration date - for example, before an earnings announcement.
Long Straddle Greeks
Delta
Gamma
Vega
Theta
50 Comments
Manish Meena May 3rd, 2011 at 1:32am
Hey peter,
First of all thanks for these awesome site on options. :)
I have a query regarding strangle v/s straddle.
In Long/short strangle you have suggested OTM call and put. while for long/short straddle you have suggested ATM call and put. What is the rational behind this.
If I create a strangle with ITM call and ITM put what would be the chances I get good return compare to OTM call and OTM put.
Thanks in advance
Peter March 17th, 2011 at 4:39pm
The magenta line shows what the theoretical P&L of the strategy is with 60 days left until the options expire.
D.Thirupathi March 17th, 2011 at 11:26am
HI sir
I could not understand the Megenta line that P$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.
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