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- How a Straddle Option Can Make You Money No Matter Which Way the Market Moves
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- Long Straddle Options Strategy - Fidelity
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How a Straddle Option Can Make You Money No Matter Which Way the Market Moves
All Rights Reserved. For the strategy to be successful, the market must show large movements to give adequate profits after covering the cost of trade. Short Straddle: This strategy is the reverse of long straddle and is implemented by selling a call and a put option with the same underlying security, strike price and expiry date.
The investor receives the premium by selling the call and put options, which is his income. The strategy is useful if the market does not show any significant movement or volatility during the option tenure and the underlying security closes near the strike prices of the options sold. If the market does not move significantly, neither the call option nor the put option will be exercised and the investor can retain the entire premium that comprises his profit. However, since the investor is not holding the underlying security, a significant market movement could result in a substantial loss.
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Let us consider an example. The RST Index is currently trading at 6, Take two investors, Rajesh and Naveen, who have totally different views on the markets. Rajesh expects it to remain extremely volatile in the near term, whereas Naveen expects it to show very little movement.
The market lot of the RST Index is 50 contracts. For simplicity, we are assuming zero brokerages and commissions. Thus, Rs 9, is Naveen's income. Long straddle reaches break-even points at 6, and 6, To profit, the market should be volatile enough to move beyond these break-even points see Long Straddle. Short straddle reaches its break-even points at 6, and 6, The market should show limited volatility; it should stay between the upper and lower break-even points for a positive payoff.
Long Straddle Options Strategy - Fidelity
If the expectation of low volatility proves wrong, short straddle leads to massive losses see Short Straddle. Settings Logout. Money Today. January, Beat the market volatility and squeeze it for profit by using a combination of call and put options called long and short straddles.