Straddle option strategy

Straddle option strategy

Straddle option strategy

Straddle option strategy is a non-directional strategy. This means that you can make money without knowing where the market will move. It doesn't matter if it moves up or down, you can make money if it moves either way. The position is created by purchasing the same number of call and put options with the same strike price and expires at the same time.

There are two types of Stradlle, long straddle and short straddle. Long Straddle is created by purchasing an at the money call option and a put option. The two options are bought at the same strike price and expire at the same time. A short Straddle is created by selling a put and a call of the same stock, strike price and expiration date. Long Straddle has unlimited profit and limited loss. While on Short Straddle the profit is limited to the premiums of the options. Short Straddle loss is unlimited if stock price goes up very high or going to zero.

Straddles is often used in uncertainty like before an important corporate announcement, earning announcement, or drug approval. When the news eventually comes out, the price will go up or down radically. Because of its characteristic, it is called a volatile option strategy. Another tip on buying Long Straddle is to buy it when it is in low volatility. The price is cheaper than when it has high volatility. When price is consolidating with an expectation that it will break out, it is the best time to Long Straddle. If you know technical analysis, you can enter the long straddle position when it shows 'triangle' or 'wedge' formations. You can notice that the recent highs and lows are coming together. It's a signs of breakouts.

The straddle trade is a long time strategy. It could take anywhere from a few days up to a month, so you don't need to watch it every few hours.

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