When trading stocks, specifically options, there are a ton of strategies you can utilize to ensure your efforts are more successful and, therefore, profitable. One such strategy is the long straddle, which allows you to take advantage of any market outlook. Keep reading to learn more about what a long straddle option is, how to employ it, and the advantages of using this options strategy.
What Is a Long Straddle Option?
A long straddle option is created by purchasing one at-the-money call option and one at-the-money put option, both of which have the same strike price, expiration, and underlying security. You establish a long straddle for a net debit and execute it as a single order. If the share price’s movement is more substantial than the straddle’s cost, you can make a profit regardless of whether the price increases or drops.
How Do You Use a Long Straddle Option?
This strategy is useful when you know that an options price is going to swing, but you’re unsure in which direction. Because you profit as long as the stock rises above or drops below the break-even point, the main risk is that the stock will stay at the same strike price until the straddle expires. In that case, the loss is still only limited to the straddle’s total cost plus any commissions you might owe.
Long Straddles vs. Long Strangles
While a long straddle involves buying a call and put option with the exact same strike price, a long strangle is when you purchase a call and put option, but the put that has a lower strike price than the call option.
Benefits of Using the Long Straddle Option Strategy
Long straddles have several advantages, such as:
- Close break-even points: Compared to a strangle, the break-even points are much closer.
- No need for an accurate price forecast: When using a long straddle, there’s no need to accurately predict how a share price will fluctuate; you just need to be right about it moving before it expires.
- Limited risk: The maximum amount of loss is predetermined because it is constrained to the cost of the call and put options. In a long straddle, you only lose this investment if the underlying price is the same as the strike price once the options expire.
- Unlimited profit: The potential for profitability is unlimited if the stock rises since there isn’t a limit to how high a stock price can rise, and still substantial if the stock declines. The reason the downside has more limited profits is that the stock can only drop as low as zero.
- Less sensitivity to time decay: Even when there is little to no movement in the stock price, a long straddle option experiences less loss over time than a strangle.
There are a lot of strategies out there that are beneficial to learn, but the long straddle trade is definitely at the top of the list. Using this strategy, you can improve your trading and lower your risks.
Founder Dinis Guarda
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