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chapter5/4 straddles

Chapter 5


A straddle consists of an equal number of puts and calls on the same stock at the same strike. The objective of a long straddle is to profit from a large swing in the price of the underlying stock. The objective of a short straddle is to reap the premium of two option contracts, realizing the maximum profit when the price of the underlying stock equals the strike price.

Buying an option can be risky and expensive, buying two options doubles the expense. The probability of profit from the purchase of one option is less than 50%, a straddle reduces that probability even further. The advantage of a long straddle is that is has the potential for theoretically unlimited profits if the stock moves in either direction.

The short straddle trader profits when the stock price remains relatively stable. The objective of the short straddle is to reap double the premium of selling a single option. The short straddle trader has the potential for large losses if the stock moves significantly in either direction.


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