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Straddle
The classical example of an options volatility strategy
A straddle is a particular options strategy where you simultaneously buy (or sell) a call and put with the same strike price and expiration date on the same underlying asset.
- Non-directional strategy
- Typically consists of buying (or selling) an ATM call and put
- Same strike price and expiry date
A long straddle is used if a trader anticipates a significant price change but is unsure which direction it will go in. This strategy involves simultaneously buying both a call and a put with the same strike price and expiration date on the same underlying asset.
A long straddle is used if a trader anticipates a significant price change but is unsure which direction it will go in. When realized volatility is high, and hence there are significant movements in the underlying in either direction, long straddles can be profitable. When realized volatility is low, long straddles can result in losses.
Example: Suppose the price of BTC is $20,000 at the moment, and I expect sharp price movements in the next week, and the premium (cost to buy a contract) for both a call and put is equal to $1,000.
- Buy one $20,000 (1BTC) call option by paying a $500 premium
- Buy one $20,000 (1BTC) put option by paying a $500 premium
With the total premium costing $1000, the long straddle on BTC with a strike price of $20,000 would break even at $19,000 or $21,000 on the expiration date. Those break-even points correspond to the prices of the underlying at expiration, where the put has paid off 1000 and the call has paid off 1000, respectively. Furthermore, the straddle is profitable once the underlying's price passes either of those levels.
A short straddle is used if a trader anticipates a slight price change but is unsure which direction it will go in. This strategy involves simultaneously selling both a call and a put with the same strike price and expiration date on the same underlying asset.
When volatility for the underlier is low, and the price is expected not to move significantly around as much, short straddles can be profitable and increase in value. On the flip side, short straddles when volatility is high, short straddles could lead to losses.
Example: Suppose the price of BTC is $20,000 at the moment, and I expect there to not be sharp price movements in the next week, and the premium (earnings from selling a contract) for both a call and put is equal to $1,000.
- Sell one $20,000 (1BTC) call option earning a $500 premium
- Sell one $20,000 (1BTC) put option earning a $500 premium
With the total premium costing $1000, the short straddle on BTC with a strike price of $20,000 would break even at $19,000 or $21,000 on the expiration date. Therefore it is unprofitable once the price passes either level.
Last modified 5mo ago