If you’ve been learning about investing/trading but still without enough knowledge about it all, you probably have seen this term (straddle) mentioned in various places without actually knowing what it’s all about. Same here. But I think it’s good time to change that.
Straddle is a strategy of options trading. It means that the investor holds a position in both – call and put option with the same strike price and expiration date.
This strategy is used when an investor thinks that the price of a stock will move significantly but he is still unsure about the exact direction. Now he opens position in both call and put and in order to make money the price does have to move significantly. If the price doesn’t move or moves just slightly the investor takes a loss. And this makes straddle strategy rather risky.
Note that with options – if the stock prices are expected to go up a lot, the premiums cost more, thus the possible payoff isn’t as big as it could be.
There are different types of straddles – long straddle and short straddle. In case of long straddle the investor goes long in call and put options. Short straddle means going short on both options.
Enough for now, more about straddle, options, etc soon.