Straddle
Buying/selling both a call and put at the same strike and expiration.
The Strategy Explained
Straddle is a sophisticated options strategy used by traders to express a specific view on the market. Unlike buying a simple call or put, this strategy involves multiple legs to structure a payoff profile that balances risk and reward according to the trader's outlook.
Market Outlook
Does this strategy benefit from bullish, bearish, or neutral moves? Typically, Straddle is deployed when:
- You have a specific price target in mind.
- You want to define your risk upfront.
- You are trading a specific volatility environment (high or low IV).
Setup and Mechanics
To construct a Straddle, a trader typically:
- Enters the Trade: By simultaneously buying and selling options at specific strikes.
- Manages Position: Monitoring Greeks (Delta, Theta) as the trade progresses.
- Exits: Closing the position before expiration to capture profit or limit loss, or holding through expiration if ITM/OTM conditions are met.
The Payoff Profile
| Metric | Value |
|---|---|
| Max Profit | Defined by the spread width or premium received. |
| Max Loss | Limited to the premium paid or margin requirement. |
| Breakeven | Strike prices +/- premium. |
When to Use It
Best for: Traders who want to limit capital exposure while targeting specific moves.
This strategy excels when you expect the underlying asset to behave in a predictable manner relative to your strikes. It is less effective if the market moves violently against your prediction or if implied volatility shifts unfavorably (Vega risk).
Example Scenario
Imagine stock XYZ is trading at $100. A trader initiates a Straddle:
- Action: Opens the position structure.
- Result: If XYZ moves to the target zone, the trade maximizes value.
- Risk: If XYZ violates the protective strikes, the loss is capped.
This entry is part of the VolParadox Options Glossary, a living database of trading terminology.