A straddle is an options trading strategy involving the simultaneous purchase of both a call option and a put option with the same strike price and expiration date. This strategy aims to profit from significant price movements in an underlying asset, whether the price moves upward (bullish movement) or downward (bearish movement).
A straddle comprises two variations: a short straddle What is a short straddle? involves selling a call and put option simultaneously with the same strike and expiration, gaining premiums from selling both options. Conversely, a long straddle What is a long straddle? entails purchasing a call and put option with matching strike prices and expiration dates. This strategy is utilised when expecting substantial price movement in the underlying asset, without certainty about the direction (upward or downward) of that movement.
With a straddle, the trader expects to profit from substantial price volatility. If the asset price experiences a substantial increase or decrease before the expiration date, one of the options will generate profit while the other will expire worthless. The key advantage of a straddle is that it allows traders to benefit from market movement regardless of whether it trends upward or downward. The success of a straddle depends on the extent of price movement and the timing of the market fluctuations before the options’ expiration.