Straddle

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The straddle is a strategy in options trading that involves the simultaneous buying of a put and a call on the same underlying stock, striking price and expiration date.

Both long straddles and long strangles, their opposite number, make money if the stock price moves up or down significantly. Long straddles and strangles have limited risk but unlimited profit potential. Short straddles make money if the stock price stays at the strike of the straddle or in between the strike prices of the strangle. Short straddles and strangles have unlimited risk and limited profit potential. [1]

Purchasing only long calls or only long puts is primarily a directional strategy. The long straddle, however, is not a directional strategy, but one where the investor feels large price swings are coming but is unsure of the direction. A long straddle benefits when the price of the underlying moves above or below the break even points.[2]

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References

  1. Straddles & Strangles. Thinkorswim.
  2. options strategies: long straddle. OIC.