Straddle definition

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A straddle is a type of options trading strategy that allows traders to speculate on whether a market is about to become volatile or not, without having to predict a specific price movement. Straddles involve either buying or selling simultaneous call and put options with matching strike prices and expiration dates.

There are two ways of employing a straddle:

  • A long straddle returns a profit if the underlying asset undergoes a significant price movement, and involves buying matching call and put options
  • A short straddle returns a profit if the underlying asset fails to undergo a significant price movement, and involves selling matching call and put options

Straddle example

You believe that Apple’s earnings are going to have a major impact on its stock price, and so buy call and put options at the same strike price. Both expire 24 hours after the earnings announcement.

If Apple shares move significantly higher above the strike price, you have the call option and can buy them at a discount. If Apple shares move significantly lower below the strike price, you have the put option and can sell them for profit.

However, if Apple’s earnings fail to make much impact on its share listings, you have to pay the premium on two options that have not earned a profit. Placing a short straddle would have allowed you to collect two premiums if the market hadn’t moved, but at the risk of losses if it had.

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