DEFINITION of 'Covered Straddle'

An option strategy that involves writing the same number of puts and calls with the same expiration and strike price on a stock owned by the investor. A covered straddle is a bullish strategy.

BREAKING DOWN 'Covered Straddle'

The covered straddle strategy is not a fully "covered" one, since only the call option position is covered. The put write position is "naked", or uncovered, which means that if assigned, it would require the option writer to buy the stock at the strike price. While gains with the covered straddle strategy are limited, large losses can result if the underlying stock tumbles to levels well below the strike price at option expiration. If the stock does not move between the date that the positions are entered and expiration, the investor collects the premiums and realizes a small gain.

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