A straddle is a trading strategy that involves options, specifically buying or selling a call option and a put option simultaneously for the same underlying asset, with the same strike price and expiration date. This strategy is used when an investor is expecting a significant move in the price of the underlying asset but is uncertain about the direction of the move. Here are the key points about a straddle:
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Long Straddle: This involves purchasing both a call option and a put option on the same underlying asset, with the same strike price and expiration date. It is used to profit from a substantial price change in the underlying asset, regardless of the direction of the change.
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Short Straddle: This strategy involves selling both a put and a call of the same underlying security, strike price, and expiration date. It is a non-directional options trading strategy that profits when there is low volatility and the price of the underlying asset at expiration has not moved much from the straddles strike price.
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Profit Potential: A straddle can lead to a loss if the stock price is close to the strike price at the expiration of the options. However, if there is a sufficiently large move in either direction, a significant profit can result.
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Use Cases: Straddles are often purchased before events such as earnings reports, new product introductions, or FDA announcements, where the direction of the stock price change is uncertain.
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Risk and Reward: A long straddle is established for a net debit and has unlimited profit potential on the upside and substantial potential on the downside, while the potential loss is limited to the total cost of the straddle plus commissions.
In summary, a straddle is a versatile options trading strategy that allows investors to profit from significant price movements in an underlying asset, regardless of the direction of the movement.
