Straddle

A straddle is a financial position that combines a long call option and a long put option on the same underlying asset with the same strike price and expiration date. The goal of a straddle is to profit from a large move in the price of the underlying asset, regardless of the direction of the move.

A straddle is a neutral strategy, meaning that it does not have a directional bias. This is because the long call option and the long put option offset each other's gains and losses. If the price of the underlying asset rises, the long call option will increase in value, while the long put option will decrease in value. Conversely, if the price of the underlying asset falls, the long call option will decrease in value, while the long put option will increase in value.

The profit potential of a straddle is limited to the difference between the strike price and the purchase price of the options. However, the risk of a straddle is also limited to the purchase price of the options. This is because the maximum loss that can be incurred is the amount of money that is paid for the options.

Straddles are often used by traders who are expecting a large move in the price of an underlying asset, but they are not sure of the direction of the move. Straddles can also be used as a hedge against a large move in the price of an underlying asset.

There are two main types of straddles:

• A bull straddle is a straddle that is created by buying a call option and a put option on the same underlying asset with the same strike price and expiration date. A bull straddle is used to profit from a large increase in the price of the underlying asset.
• A bear straddle is a straddle that is created by selling a call option and a put option on the same underlying asset with the same strike price and expiration date. A bear straddle is used to profit from a large decrease in the price of the underlying asset.

Straddles are a complex financial instrument and should only be used by experienced traders.