Straddle

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What is a 'Straddle'

A straddle is an options strategy with which the investor holds a position in both a call and put with the same strike price and expiration date. This allows the investor to make a profit regardless of whether the price of the security goes up or down, assuming the stock price changes dramatically.

 

 

Straddle

BREAKING DOWN 'Straddle'

Straddles are a good strategy to pursue if an investor believes that a stock's price will move significantly, but is unsure as to which direction. The stock price must move significantly if the investor is to make a profit, as the investor must purchase both the call option and the put option. As shown in the diagram above, should only a small movement in price occur in either direction, the investor will experience a loss. As a result, a straddle is extremely risky to perform. The investor must set an expiration date that allows the stock enough time to change in value. Additionally, on stocks that are expected to jump, the market tends to price options at a higher premium, which ultimately reduces the expected payoff should the stock move significantly.

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