The long straddle option strategy is a neutral options strategy that capitalizes on volatility increases and significant up or down moves in the underlying asset. Although many options strategies capitalize on the passage of time, the long straddle is not one of them.
Dramatic moves in either direction or sharp volatility spikes are needed for long straddles to be profitable trades. Not to be confused with the long strangle , which involves calls and puts of different strike prices, the long straddle only involves the same strike price options.
Long straddles are always traded with the exact same strike price. If the long call and the long put are different strike prices, it is considered a long strangle. The best case scenario for a long straddle is for the underlying instrument to completely crash down or surge up. When this happens, volatility tends to expand, and the straddle benefits. The maximum profit for long straddle is theoretically unlimited for the upside, and capped at the underlying asset going to zero on the downside.
The maximum loss is always the total sum of the premium spent for buying the long call and put options. The long straddle option strategy a unique way to create a situation with unlimited profit either up or down that has a very conservative and limited loss.
Traders commonly place long straddles ahead of earnings reports, FDA announcements, and other anticipated binary events. Because the long straddle option strategy is entirely risk-defined, margin requirements are simple.
The buying power requirement for all long options positions is equal to the sum of the option premium. In the case of the long straddle, the total premium spent is the margin requirement, and always will be for the entire duration of the trade.
If the underlying asset like a stock, futures contract, index, etc. This means timing is very important. Because there is an unlimited profit potential on the upside and a very large profit potential on the downside, it is difficult to know precisely when to close out a profitable long straddle.
Basically, a long straddle is tantamount to being simultaneously long and short the same asset. Therefore, you should close out a long straddle whenever you would normally close out a long or short position.
If the position is unprofitable, and the option premium has neared zero, there is no reason to close out the trade.
There is always a chance that the underlying asset can move dramatically, or volatility can increase, and make the trade profitable again. Due to the fact the fact that straddles are always traded at the money, either the call or the put is going to expire in-the-money. Because one leg of a straddle will always expire ITM, this options trading strategy needs additional attention around the time of expiration. If a long put expires ITM, a margin call could be issued if there is not enough cash in your account to short the appropriate amount of the underlying security at the strike price.
Similarly if the long call expires ITM, a margin call could be issued if there is not enough cash in your account to buy the underlying at the strike price. All potential expiration predicaments with long straddles can be fully avoided by checking expiring options positions the day before and the day of expiration.
Depending on your options broker , you will usually be notified of expiring positions that are ITM. On the surface, long straddles seem like the perfect options trading strategy.
Who knows if a stock is going to move up or down? The only way the long straddle option strategy will not be profitable is if nothing happens prior to expiration, or if volatility collapses.
Therefore, long straddles are very interesting trades for volatile markets with large price swings. The straddle option strategy is a neutral options trading strategy that involves either buying the exact same strike price call. The long strangle option strategy is a neutral options trading strategy with limited risk that capitalizes on either up or. Close Search Blog posts.More...