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