Straddles – Profit in Either Direction
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Straddles – What is it?
The straddles option strategy is a trade where the trader can wind up profiting either way the market moves. It the market moves up the trader profits. If the market moves down the trader profits.
Straddles – How It’s Constructed
This trade is comprised of two different options – both a call and a put option – which are purchased at the same strike price. Usually these options are purchased at the money – meaning at the strike closest to where the underlying stock or index that is being used is trading at.
For example, let’s say that are favorite non existant stock called XYZ is trading at 50.20.
If we wanted to place a straddles trade on this, we would purchase one 50 strike call. And the one 50 strike put.
Since we purchased an equal number of both call and put options at the same strike – this trade will profit at least on one of these options no matter which way the market moves.
Straddles – How It Makes Money
If the market moves up, the calls will profit. If it moves down, the puts will profit.
Now of course, if the stock moves up, the puts will lose value while the calls are making money – and vice versa if the stock moves down. However, the idea behind the straddle is that at some point during these moves, the put will stop losing value as all the value in them gets depleted – meanwhile the calls continue to gain value – which is where the profit kicks in.