Straddle

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Straddle

A straddle is a financial strategy that involves the simultaneous purchase or sale of both a put option and a call option on the same underlying asset, with the same strike price and expiration date. This strategy is used by investors to profit from significant movements in the price of the underlying asset, regardless of the direction of the movement.

Types of Straddles

There are two main types of straddles: the long straddle and the short straddle.

Long Straddle

A long straddle involves buying both a call option and a put option. This strategy is used when an investor expects a significant price movement in the underlying asset but is unsure of the direction. The potential profit is unlimited if the price moves significantly in either direction, while the maximum loss is limited to the total premium paid for the options.

Short Straddle

A short straddle involves selling both a call option and a put option. This strategy is used when an investor expects little to no movement in the price of the underlying asset. The potential profit is limited to the total premium received from selling the options, while the potential loss is unlimited if the price moves significantly in either direction.

Risks and Rewards

The primary risk associated with a straddle is the potential for significant loss if the price of the underlying asset does not move as expected. For a long straddle, the risk is limited to the premium paid for the options. For a short straddle, the risk is unlimited, as the price of the underlying asset can move significantly in either direction.

The reward for a long straddle is unlimited, as the price of the underlying asset can move significantly in either direction, leading to substantial profits. The reward for a short straddle is limited to the premium received from selling the options.

Applications

Straddles are commonly used in options trading and are particularly useful in situations where an investor expects a significant price movement due to events such as earnings announcements, economic data releases, or other market-moving events.

See Also

• Options trading
• Put option
• Call option
• Strike price
• Expiration date
• Financial strategy

References

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