Simple Approach to Understand Straddle Strategies

The long straddle, also called the buy straddle or straddle is an impartial strategy related to options trading. It includes the concurrent buying of a put and a call of the similar base stock, striking rate and termination period.

There are two types of straddle:

Long Straddle

The long straddle is developed with regard to purchase of a put and a call at the precise strike rate and termination period. The long straddle tries to benefit from market price transformation by manipulating enhanced instability.

Irrespective of the direction of market price movement, a long straddle position would enable the investor to benefit from it.

Demerits of Long Straddle

  • High probability of loss.

Short Straddle 

The short straddle needs the trader to sell the put as well as the call option at a similar strike rate and termination period. The process of selling the options ensure the trader can receive a premium (profit).

A trader prospers only if a short straddle exists in a market with no instability.

The chance to book profits would depend completely on the markets in capability to transit upwards or downwards.

If there is any kind of bias in the market, the cumulative premium accumulated is at risk.

The performance of a straddle depends on basic restrictions that options normally have, along with the general movement in the market.

A short straddle’s firmness could also be its downside. A put and a call are sold to enhance revenue from premiums.

The huge amount spent by put and call purchasers goes to the trader’s account. This could be of immense benefit to a trader. However, if the option is sold, the investor is exposed to unrestricted risk.

The traders are under pressure to either buy or sell, receive premium or reimburse premiums, though the straddle is a perfect leveller.

The straddle ensures the trader is guided by the market. It would be prudent for traders to benefit from being at two different points concurrently – a put and a call.

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