Long Straddle
long straddle
 Details
 Category: nonsynthetic futures and option strategies
 Published on Wednesday, 17 February 2010 23:54
option straddle (long straddle)
the long straddle, also known as buy straddle or simply "straddle", is a neutral strategy in options trading that involve the simultaneously buying of a put and a call of the same underlying stock, striking price and expiration date.
long straddle construction

buy 1 at the money call

buy 1 at the money put

long straddle options are unlimited profit, limited risk options trading strategies that are used when the options trader thinks that the underlying securities will experience significant volatility in the near term.
unlimited profit potential
by having long positions in both call and put options, straddles can achieve large profits no matter which way the underlying stock price heads, provided the move is strong enough.the formula for calculating profit is given below:
 maximum profit = unlimited
 profit achieved when price of underlying > strike price of long call + net premium paid or price of underlying
 profit = price of underlying  strike price of long call  net premium paid or strike price of long put  price of underlying  net premium paid
limited risk
maximum loss for long straddles occurs when the underlying stock price on expiration date is trading at the strike price of the options bought. at this price, both options expire worthless and the options trader loses the entire initial debit taken to enter the trade.the formula for calculating maximum loss is given below:
 max loss = net premium paid + commissions paid
 max loss occurs when price of underlying = strike price of long call/put
breakeven point(s)
there are 2 breakeven points for the long straddle position. the breakeven points can be calculated using the following formulae. upper breakeven point = strike price of long call + net premium paid
 lower breakeven point = strike price of long put  net premium paid
example
suppose xyz stock is trading at $40 in june. an options trader enters a long straddle by buying a jul 40 put for $200 and a jul 40 call for $200. the net debit taken to enter the trade is $400, which is also his maximum possible loss.
if xyz stock is trading at $50 on expiration in july, the jul 40 put will expire worthless but the jul 40 call expires in the money and has an intrinsic value of $1000. subtracting the initial debit of $400, the long straddle trader's profit comes to $600.
on expiration in july, if xyz stock is still trading at $40, both the jul 40 put and the jul 40 call expire worthless and the long straddle trader suffers a maximum loss which is equal to the initial debit of $400 taken to enter the trade.
note: while we have covered the use of this strategy with reference to stock options, the long straddle is equally applicable using etf options, index options as well as options on futures.
commissions
for ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.
however, for active traders, commissions can eat up a sizable portion of their profits in the long run. if you trade options actively, it is wise to look for a low commissions broker. traders who trade large number of contracts in each trade should check out optionshouse.com as they offer a low fee of only $0.15 per contract (+$8.95 per trade).
Non Synthetic Positions

Long Call Butterfly

Long Futures Position

Short Futures Position

Long Call

Short Call

Bear Spread (call & put)

Bull Spread (call & put)

Long Put

Short Put

Long Straddle

Short Straddle

Long Strangle

Short Strangle

Call Ratio Spread

Put Ratio Spread

Call

Call Ratio Backspread

Put Ratio Backspread

Long Put Butterfly

Short Butterfly

Box Or Conversion/Reversal
Please be aware that trading futures and options involves substantial risk of loss and is not suitable for all investors.
Past performance is not necessarily indicative of future results.
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