What is Straddle?

Print Friendly, PDF & Email

“Market is in very choppy range and getting ready for big move”, “Market is cautious and trading in very narrow range. The upcoming event will decide the next market move.” We often hear these descriptions of the market from experts.

How to play quarterly results, big announcements or any other event which can define the market or stock movement.

A straddle is a very good options strategy to play above.

A straddle is a “limited risk – unlimited profit” options strategy where trader buys a call and a put of same strike price as well as of the same expiry.

Since in straddle trader have long call and put can make a huge profit on either side provided, underlying gives strong move.

Since it’s a “limited risk – unlimited profit” options strategy maximum risk (loss) is combined premium paid (premium paid of both call and put).

In a straddle, Break-even points are an important thing to understand. There are two break-even points. And those can be calculated by using below formulas.

Upper Break-even point = net premium paid + strike price of the long call

Lower Break-even point = strike price of long put – net premium paid

Let’s assume, XYZ corp. is trading at Rs. 70. Trader A expects a big price movement in the stock hence, buys a straddle. Means he buys both call and put of 70 strike of same expiry.

As far as stock price expires above or below the break-even points (70 + combined premium or 70 – premium) trader has positive payoffs.

While trading call option full-filling margin requirement is necessary. To check what margin is required to trade call option check SAMCO’s SPAN calculator.

Important Facts for Trading Straddles

Buying Call Options

Margin Applicable – None, however, the option premium is payable upfront.

Risk – Reward – Maximum Loss is restricted to the premium, whereas the maximum profit can be unlimited.

Buying Put Options

Margin Applicable – None, however, the option premium is payable upfront.

Risk – Reward – Maximum Loss is restricted to the premium, whereas the maximum profit can be unlimited.

Leave A Comment?

This site uses Akismet to reduce spam. Learn how your comment data is processed.