Long straddle

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Straddles and strangles are volatility strategies. They seem like simple strategies, but are in fact fairly advanced as your predictions must options straddle definition quite accurate for them to work out.

A straddle options straddle definition of buying or selling both a call and a put of the same strike. Usually this is done with at-the-money options and therefor is initially a delta neutral strategy as at-the-money calls and puts have around 50 deltas, positive and negative, respectively. For a long straddle you buy the call and put and a short straddle you sell them. With a long straddle you are long gamma, long vega, and negative theta.

By buying both the call and the put, you are spending money, buying premium. Your upside and downside profit potential are unlimited options straddle definition stock reaches zero and your maximum loss is what you paid for the straddle.

If you have bought a straddle near expiration, the time decay on the premium of the options will be extreme. Therefore, you will need stock to move either up or down beyond the price of options straddle definition straddle to make money. A move up in implied volatility may or may not be enough to make up for the time decay. You might buy a near term straddle before an event if you think the move in the stock, up or down, will be greater than the price of the straddle.

With this strategy it is important to look at historical moves after events. For example if it is an earnings, you might look at the previous three or more earnings to see if the stock has moved beyond the price of the straddle following the announcement. Many times the average earnings move is priced already into the options.

You options straddle definition generally would want to sell the straddle quickly after the event as implied volatility will generally come in. If you think stock will be moving around a lot over the duration of the life of the straddle you might buy with options straddle definition expectation of scalping stock.

As stock goes up the straddle will become a long delta position the call goes in-the-money, options straddle definition put out-of-the-money and you can sell stock to stay delta neutral. As the underlying moves down you become short deltas the put goes in-the-money and the call out-of-the -money options straddle definition you would buy stock to be delta options straddle definition.

A long straddle further out will have less negative theta time decay and more positive vega. One might buy a long straddle a few months out if you think that volatility is trading especially low and that options straddle definition could be stock movement or uncertainty occurring down the road that would cause implied volatility to go options straddle definition.

To make a volatility determination, you might look at day historical volatility. Another consideration might be a year long graph of day implied volatility. If day implied volatility options straddle definition not been below say 40 all year and you are buying lower than that then you might consider it low.

You might look at where earnings and events fall in relation to the straddle and what implied volatility has done historically in relation to earnings and events. You might consider the volatility of the underlying versus other similar underlyings or the market as a whole. You can see that even though a long straddle would seem to be a low risk strategy that it in fact requires a lot of consideration and precision of expectation in order to be profitable.

A short straddle, on the other hand, is a high risk position. As you can see from the graph that losses are unlimited options straddle definition profits max at the price received for options straddle definition sale of the straddle. Profits are only in the span of up or down the price of the straddle from the strike. With a short straddle you are short gamma, short vega and positive theta.

You want stock to stay still, implied volatility to come in and the option premium to just decay away. You might sell a straddle if you think that implied volatility is exaggerated compared to the movement you expect in the stock. Strangles have many of the same characteristics as straddles, but with a larger margin of error.

For a strangle you buy or sell both an out-of-the-money call and an out-of-the-money put of the same expiration. Thus the premium paid or received is considerably lower than a straddle. On the other hand, with a long strangle you need the stock to move quite a bit farther or volatility to go up quite a bit more vega being smaller out-of-the-money for it to be profitable. A short strangle has options straddle definition larger area of profitability, but the maximum profit is not as great because the premium received for out-of-the-money options is less.

The theta is also smaller so decay will not be as dramatic. Or as in the PCLN example given above this link is to analysis as a options straddle definition to a riskier strategy to take advantage of a volatility skew between months.

Strangles tend to be a lower premium strategy as compared to straddles, but the probability that you lose all of your premium is also higher. If you think volatility is low, you can buy a straddle that has a higher probability of being profitable if you are correct, but the strangle has a much higher payout if the stock makes an extreme move. Your decision will depend on your expectations, your risk tolerance and your conviction. Both options straddle definition and strangles are strategies to take advantage of a perceived mispricing of options where the trader thinks that implied volatility or premium does not represent what the underlying will do, but where he or she does not have a strong directional opinion.

They are often tempting, but should definitely be used with consideration. Straddle A straddle consists of buying or selling both a call and a put of the same strike. Long Straddle With a long straddle you are long gamma, options straddle definition vega, and negative theta.

Short Straddle A short options straddle definition, on the other hand, is a high risk position. Strangle Strangles have many of the same characteristics as straddles, but with a larger margin of error.

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In finance , a straddle refers to two transactions that share the same security, with positions that offset one another. One holds long risk, the other short. As a result, it involves the purchase or sale of particular option derivatives that allow the holder to profit based on how much the price of the underlying security moves, regardless of the direction of price movement.

A straddle involves buying a call and put with same strike price and expiration date. If the stock price is close to the strike price at expiration of the options, the straddle leads to a loss. However, if there is a sufficiently large move in either direction, a significant profit will result. A straddle is appropriate when an investor is expecting a large move in a stock price but does not know in which direction the move will be. The purchase of particular option derivatives is known as a long straddle , while the sale of the option derivatives is known as a short straddle.

A long straddle involves "going long," in other words, purchasing both a call option and a put option on some stock , interest rate , index or other underlying. The two options are bought at the same strike price and expire at the same time.

The owner of a long straddle makes a profit if the underlying price moves a long way from the strike price, either above or below. Thus, an investor may take a long straddle position if he thinks the market is highly volatile , but does not know in which direction it is going to move.

This position is a limited risk, since the most a purchaser may lose is the cost of both options. At the same time, there is unlimited profit potential. For example, company XYZ is set to release its quarterly financial results in two weeks. A trader believes that the release of these results will cause a large movement in the price of XYZ's stock, but does not know whether the price will go up or down.

He can enter into a long straddle, where he gets a profit no matter which way the price of XYZ stock moves, if the price changes enough either way. If the price goes up enough, he uses the call option and ignores the put option. If the price goes down, he uses the put option and ignores the call option.

If the price does not change enough, he loses money, up to the total amount paid for the two options. The risk is limited by the total premium paid for the options, as opposed to the short straddle where the risk is virtually unlimited.

If the stock is sufficiently volatile and option duration is long, the trader could profit from both options. This would require the stock to move both below the put option's strike price and above the call option's strike price at different times before the option expiration date. Also, the distance between the break-even points increases. A short straddle is a non-directional options trading strategy that involves simultaneously selling a put and a call of the same underlying security, strike price and expiration date.

The profit is limited to the premium received from the sale of put and call. The risk is virtually unlimited as large moves of the underlying security's price either up or down will cause losses proportional to the magnitude of the price move.

A maximum profit upon expiration is achieved if the underlying security trades exactly at the strike price of the straddle. In that case both puts and calls comprising the straddle expire worthless allowing straddle owner to keep full credit received as their profit.

This strategy is called "nondirectional" because the short straddle profits when the underlying security changes little in price before the expiration of the straddle.

The short straddle can also be classified as a credit spread because the sale of the short straddle results in a credit of the premiums of the put and call. A risk for holder of a short straddle position is unlimited due to the sale of the call and the put options which expose the investor to unlimited losses on the call or losses limited to the strike price on the put , whereas maximum profit is limited to the premium gained by the initial sale of the options.

A tax straddle is straddling applied specifically to taxes, typically used in futures and options to create a tax shelter. For example, an investor with a capital gain manipulates investments to create an artificial loss from an unrelated transaction to offset their gain in a current year, and postpone the gain till the following tax year. One position accumulates an unrealized gain, the other a loss. Then the position with the loss is closed prior to the completion of the tax year, countering the gain.

When the new year for tax begins, a replacement position is created to offset the risk from the retained position. Through repeated straddling, gains can be postponed indefinitely over many years. From Wikipedia, the free encyclopedia.

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