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Straddle Option Strategy

Straddle Option Strategy

What is Straddle Option Strategy?

  • Long Straddle is just opposite Short Straddle and is a Volatility Strategy that aims to make money wherein you do expect underlying to show any significant movement or expecting rise in volatility. Long Straddle strategy demands underlying to move significantly i.e., this is non direction strategy. In other words, if the underlying shows a significant move and closes above or below bought strike trade will gain significantly.

When to Execute?

  • Long Straddle is a non-directional strategy, but trade must also be bullish on volatility. It is advised that long straddle should be implemented when there is an event in near term, and volatility is on the lower side and expected to increase or can be implemented on high Volatile underlying. Long Straddle generally Implemented before any major events, like Elections, Budget etc.

What is the Trade?

  • Under Short Strangle We Buy one-one lot of At-the-Money (OTM) Call and Put for the same underlying, same strike price and same expiry.

Break-Even Point

  • Long Strangle will have 2 break-even points. The breakeven points can be calculated as given below. Lower Breakeven = ATM Strike Price - Net Premium Paid. Upper Breakeven = ATM Strike Price - Net Premium Paid.

What will be maximum profit?

  • Maximum Profit is undefined if market shows the significant move and stays in above upper and lower breakeven.

What will be maximum loss?

  • It is Net debit strategy as we have bought both Call & Put, Maximum loss is only at bought strike price i.e., ATM strike.

What are the advantages?

  • Being Directional Neutral, you can participate in either way volatility jumps. Ideal to trade Straddle for stocks where earnings are due to be announced. On Indices where any major macro-economic data is due.

What are the disadvantages?

  • Time decay is harmful to Straddle. Time day accelerates exponentially in the last week of expiry. The cost to establish a long Straddle is significantly high. If stock fails to give desired move, one can lose the premium.

Example of Long Straddle:

  • Nifty future price is 15500. Long Straddle can be devised by buying one lot of 15500 PE @ 80 and one lot of 15500 CE at Rs. 90. Net Premium Paid = Rs.170. Undefined profit potential if stock moves above or below the upper or lower breakeven i.e., 15670 and 15330. Max loss if underlying closes at 15500.