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Long Straddle

Profile Version / Simplified Version / Comprehensive Version

Purpose Of Straddle
1. To Profit When A Stock Goes Up Or Down


Expectations Of Straddle
Volatile


Type Of Spread
Debit Spread


How To Use Straddle?
Buy a call option and a put option on the underlying stock, at the same strike price.

Buy ATM Call + Buy ATM Put
Long Straddle Risk Graph Learn How To Read This Chart


Profit Potential of Straddle :
The Straddle profits when the underlying rallies above or ditches below the upper / lower breakeven point.

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Profit Calculation of Straddle:
% Return = [Exit Price of Underlying Asset - (Strike Price + Net debit)*] Net Debit

* : If the underlying asset is down, use (Strike Price - Net debit)


Risk / Reward of Straddle:
Maximum Profit: UnLimited

Maximum Loss: Limited
Net Debit Paid


Break Even Point of Straddle:
There are 2 break even points to a straddle. One breakeven point if the underlying asset goes up (Upper Breakeven), and one breakeven point if the underlying asset goes down (Lower Breakeven).

Upper BEP: Strike Price + Net Debit Paid
Lower BEP: Strike Price - Net Debit Paid


Advantages Of Straddle :

  • Able to profit no matter if the underlying asset goes up or down.

  • Unlimited profit if the underlying asset continues to move in one direction.

  • Saves time from having to analyse if a stock will go up or down ahead of major news releases.

  • Loss is limited to the debit paid.

  • If volatility is low at the time of purchase and volatility rises, both options could profit even without an appreciable change in the stock price.

  • No need to buy the underlying asset which is good for investors with small funds.


    Disadvantages Of Straddle:

  • There will be more commissions involved than simply buying call or put options.

  • You can lose more money if the underlying asset stayed stagnant than if you simply bought a call or put option.

  • If the underlying asset rises above the strike price or falls below the strike price but remains below the upper break even or above the lower break even you will still incur a loss on the position.

  • If volatility falls for both or either option, the position could lose with or without a price swing in the underlying asset.


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