Option Trading Lesson 2.2

What Is a Straddle?

More broadly, straddle strategies in finance refer to two separate transactions which both involve the same underlying security, with the two component transactions offsetting one another. Investors tend to employ a straddle when they anticipate a significant move in a stock's price but are unsure about whether the price will move up or down.

How do you earn a profit in a straddle?

To determine how much an underlying security must rise or fall in order to earn a profit on a straddle, divide the total premium cost by the strike price.

Assume: Stock XYZ current market price is $100, 持有股票= 有貨

• Long Straddle (LP 100, LC 100)

A long straddle (同價錢、同到期日，升跌兩邊買晒) is an options strategy where the trader purchases both a long call and a long put on the same underlying asset with the same expiration date and strike price. (投資者認為到期日價錢不會停留在$100)

Theoretically, this strategy allows the investor to have the opportunity for unlimited gains. At the same time, the maximum loss this investor can experience is limited to the cost of both options contracts combined. 

This makes it much more difficult for traders to profit from the move because the price of the straddle will already include mild moves in either direction. If the anticipated event does not generate a strong move in either direction for the underlying security, then options purchased likely will expire worthless, creating a loss for the trader. (如果股價唔夠波動，便會造成損失)

• Short Straddle (SP 100, SC 100)

Short straddles are when traders sell a call option and a put option at the same strike and expiration on the same underlying. A short straddle profits from an underlying lack of volatility in the asset's price.

Premiums are collected when the trade is opened with the goal to let both the put and call expire worthless. However, chances that the underlying asset closes exactly at the strike price at the expiration are low, and that leaves the short straddle owner at risk for assignment. 

They are generally used by advanced traders to bide time. (投資者認為到期日價錢會停留在$100)

Source: Investopedia