Straddle options

Straddle options

Wise traders usually try to decrease the risks and have the same (or more significant) return on their portfolio. One way to lower the risks is futures contracts, and the other is options. In this article, we’ll define how the straddle option strategy works and what are the benefits of using it.

What is the straddle option strategy

There are two types of options: call and put. Traders buy call options when they expect the price of the underlying asset to rise. On the contrary, if they anticipate a price decrease, they buy put options. Also, options have an expiration date, a period to close the option. A strike price is an expected price of the underlying asset. When we buy options, we pay the premium to the seller. Consider this as a commission for the trade.

To make a straddle option, we need to buy put and call options with the same expiration date and strike price. The straddle option will work as a bet on the volatility increase because it’s almost the same as when you open a buy and sell trade for an asset. The difference is in the options nature that gives bigger returns when the stock moves away from the strike price.

What is an example of a straddle

Imagine you expect a massive movement in Tesla stock but don’t know the direction. Then you may buy the call and put options with the same expiration date and strike price. From now on, you have a trade that costs you the premium. You will be in profit if the price moves far enough from the strike. On the contrary, your loss is limited by the premium. 

Be aware that options are among the riskiest assets, and the losses can be unlimited if a trader makes a mistake in placing the orders.

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2022-07-08 • Updated

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