Long Straddle:
How To Benefit From Huge Moves Without Knowing Which Direction

Long Straddle

Strategy Description: This strategy entails the purchase of both a Call and a Put option (either at-the-money or near-the-money) for the same underlying that have the same expiration date and strike price.

It is used when you feel that the underlying is going to have a huge move, but you just can’t be sure which way it might go. To capitalize on your view, you can therefore initiate a long straddle trade and position yourself to benefit from the situation should it turn out to be as you have predicted.

In order to be successful with this strategy, you need somewhat large move of the underlying in either direction. The profiting of such potential explosive move in either direction make this option strategy a tremendous advantage over conventional stock trading as such view can only be implemented using this option trading strategy.

The money is made when the underlying declined or moved up extensively. When the underlying decreases in price, your put option becomes more in-the-money, conversely, when the underlying increases in price, the call option becomes more valuable. Some traders may choose to abandon one leg during the move to maximize the profit of the other leg and close out later when the time is right.

Risk and Reward: Since you are buying options, your risk will be limited (provided both options are also closed simultaneously) although you will have to bear in mind that your option position are subjected to time decay and you therefore have to be precisely or quite right about the timing of the move (for example - right before the announcement of a much anticipated results release). The reward is supposedly unlimited, but you may want to not over stay and head for the exit soon after your target is met or that you sense it is time to close the positions to minimize the effect of time decay.

Conclusion:

The Key Elements for using Long Straddle are:

1. Explosive Move in Either Direction
2. Precise Timing, and
3. Limited Risk with Unlimited Reward

"May the Force be With You!"

Long Straddle - Short definition from the Glossary Page

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