This article is about the combination of financial derivatives. For other uses, see Straddle (disambiguation).
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In finance, a straddle strategy involves two transactions in options on the same underlying, with opposite positions. One holds long risk, the other short. As a result, it involves the purchase or sale of particular option derivatives that allow the holder to profit based on how much the price of the underlying security moves, regardless of the direction of price movement.
A straddle involves buying a call and put with same strike price and expiration date. If the stock price is close to the strike price at expiration of the options, the straddle leads to a loss. However, if there is a sufficiently large move in either direction, a significant profit will result. A straddle is appropriate when an investor is expecting a large move in a stock price but does not know in which direction the move will be.[1]
A straddle made from the purchase of options is known as a long straddle, bottom straddle, or straddle purchase, while the reverse position, made from the sale of the options, is known as a short straddle, top straddle, or straddle write.[2][3]
^S, Suresh A. (2015-12-28). "ANALYSIS OF OPTION COMBINATION STRATEGIES". Management Insight. 11 (1). ISSN 0973-936X.
^Hull, John C. (2006). Options, futures, and other derivatives (6th ed.). Upper Saddle River, N.J.: Pearson/Prentice Hall. pp. 234–236. ISBN 0131499084.
^Natenberg, Sheldon (2015). "Chapter 11". Option volatility and pricing: advanced trading strategies and techniques (Second ed.). New York. ISBN 9780071818780.{{cite book}}: CS1 maint: location missing publisher (link)
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