Derivatives - Straddle Option Strategies
What if you do not know which direction a stock will move in, but you have the sense it will move dramatically one way or the other? There is an options strategy for that, too. It is called a straddle.
More specifically, it is called a long straddle - buying a put and a call on the same underlying asset, exercise price and expiration date. Whether the stock moves one way or the other, the investor profits, but the stock has to move enough to pay off the premiums on both options. Essentially, the investor is betting on volatility.
Let's assume an investor buys a 1 MNO May 100 call @ 1 and 1 MNO May 100 put @ 1:
Figure 8.7: Long Straddle
If there is such a thing as a long straddle, there has to be a short straddle - selling a put and a call on the same underlying asset, exercise price and expiration date. The seller's bet is that the stock price will not be volatile:
Figure 8.8: Short Straddle
- Combinations are essentially straddles, but the put and call have different exercise prices or expiration dates.