Straddle Option Strategy

In derivatives straddles is an options strategy that allow an investor or trader to gain on considerable moves in a stock’s price, that move may be on higher side or on lower side. Under the strategy an investor has to buy an equal number of calls and put options with the same expiration date.

For example, if a person is using straddle and let’s assume that the price of ABC stock is currently at $100. Suppose the price of the $100 call option for this month has a price of $3. The price of the $100 put option has a price of $3. A straddle is achieved by buying both the call and the put for a total of $600($3 + $3) x 100. The investor using this strategy will gain if the stock moves higher or lower by more than $6 that is if stock is above $106 or below $94.

As one can see that a person who is using straddle strategy believes that stock will move significantly, if the stock price does not move significantly than he or she will make a loss. In the above example of ABC stock, if it does not move either above $106 or below $94 than it will lead to loss on the straddle strategy.

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