What Is A Straddle?

A straddle is a trading strategy utilizing both call and put options with the same exercise price and expiry date. This strategy is used when an investor believes the underlying asset will be volatile, but cannot predict which direction it will move. The idea is that as long as the asset prices moves enough in either direction, the profit on the corresponding option will outweigh the losses on the other. However, if the asset price does not move enough then the investor will lose money on both options

There are 2 kinds of straddle:

  • Long Straddle - Buying a put and call. This limits losses to the cost of the options but has unlimited upside
  • Short Straddle - Selling a put and call. This gives guaranteed premiums from selling the options, but has unlimited downside if the price moves significantly in either direction

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