A long straddle is a strategic options approach that involves the simultaneous purchase of a call option and a put option, both sharing identical strike prices and expiration dates. This tactic is employed by investors or traders when they foresee substantial price volatility in the underlying asset, but they remain uncertain about the specific direction in which the price might move—whether it will rise or fall. A straddle comprises two variations: a short straddle What is a short straddle? and a long straddle What is a long straddle?
The key objective of initiating a long straddle is to capitalise on a significant price fluctuation in the underlying asset. By investing in both a call and a put option at the same strike price and expiry, traders aim to benefit from the asset’s potential movement, irrespective of whether it moves upwards or downwards. This strategy allows investors to profit from the underlying asset’s price changes, covering the combined cost of purchasing both options.
It’s crucial to note that the success of a long straddle hinges on the extent of the price movement. The greater the price shift within the defined timeframe, the higher the potential for profits. Conversely, if the asset price doesn’t experience significant movement, the options may expire worthless, resulting in a loss limited to the total premium paid for both options.
To find out what is a short straddle click here. What is a short straddle?