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Long Straddle Option Strategy

Long Straddle Option Strategy : The strike price is close to the call benefit from upward. The main aim of straddle is to make a profit from a strong move triggered by the direction of underlying assets. The trader will move from low to high volatility based on the imminent release of new information. They use a long straddle of a news report as earning release passage of election.

When to use

The traders use a long straddle options strategy before news like the earnings release of a new law. The effect is unknown as there is no way to know to expect a bullish outcome. These is perfect and beneficial from either outcome. The long straddle option also has limitations and challenges from investment strategies.

Benefits

They provide an opportunity for unlimited profit while taking a limited risk. The potential profit is unlimited resulting in stock prices soaring. The stock price goes downward. We get a potential gain from the stock that drops to zero. With the expiration, there are two prospective breakeven points for the stock price. The long straddle option makes a profit when underlying stock prices rise and cross the upper breakeven point.

Profit/Loss

The maximum gain has a long straddle unlimited to the position that continues to pick up again the stock travel in another direction. Here maximum loss is equal to the net premium paid.

Breakeven

The lower breakeven is equal to the strike price of put minus net premium. The upper breakeven is equal to the strike price of call net premium that traders lose the straddle cost and max loss if a stock pin at the straddle strike price.

Example

The stock is trading at $100 and one that expects the stock to increase/decrease in the future. Investor purchase $100 call, $100 put for net cost premium of $6.The stocks were to trade up to $125 upon expiration then a $100 call would be worth $25 less than the $6 premium. It results in a profit of $19 if the stock were to drop in price to $75 upon expiration than a $100 put option that has a value of $25results in the same $19 profit after deducting the premium paid.

Conclusion

The long straddle is made up of two purchased options as time decay works against the strategy. The strategy loses the value every day to time decay the longer the straddle the more it depreciates. It has unlimited profit potential and tends to work in volatile markets. The investor doesn’t worry about the direction of price movement and benefits from volatility. The amount of price changes must be significant to make a profit as the premium paid must be high.