Recent

3/recentposts

Popular Posts

Theme images by Storman. Powered by Blogger.

Sample Text

Pages

Unordered List

Recent in Sports

4/Sports/custom-widget

Home Ads

Home Ads

Tags

#1 Live Trading on Glenmark Pharmaceuticals Ltd #1 Live Trading on Godrej Industries Limited #3 Live Trading Session 1-2-3 Strategy 1-2-3-4 Reversal Trading Strategy 10 CHART PATTERNS FOR PRICE ACTION TRADING 10 Habits of successful traders 10 Performing Candlesticks 10 PRICE ACTION BAR PATTERNS YOU MUST KNOW 10 PRICE ACTION CANDLESTICK PATTERNS YOU MUST KNOW 10 Things You Can Learn From The World’s Best Traders 10 TYPES OF PRICE CHARTS FOR TRADING 123 forex trading strategy 123 Trading Strategy 200 SMA 3 Bar Net Line Strategy 6 Best Price Action Trading Strategies 7 RSI TRADING STRATEGIES 9 Advanced & Profitable Trading Strategy 9 Funny Facial Expressions AB = CD Price Action Strategy Abb India Limited Aditya Birla Nuvo Limited Aditya Birla Nuvo Ltd ADVANCED REVERSAL STRATEGY Alice Blue Opening Link Alphabets Amaraja Battries Ambuja Cement Anupam Rasayan India Limited IPO Asian Paint Ltd Aurobindo Pharma Limited Bajaj-Auto Bearish Crossover Bearish Engulfing Bearish Engulfing Candle Bearish Reversal (Red-Red) BEML Ltd Best Stock Market Strategy Bharat Finance Inclusion Blood Rain Pattern bollinger band Bollinger Band Price goes below Mid line Strategy Bollinger Band Price gone above mid line Bollinger Band Strategy Breakout Stock Trading Strategy Bullish Crossover Bullish Engulfing Bullish Gartley Pattern Strategy Bullish Three Bar Reversal Butterfly Spread Cadila Healthcare Limited Calendar Spread Camarilla Equition canara Bank Candlestick Charts Candlestick Patterns Candlestick Patterns Strategy Cesc Limited Chart Patterns Cipla Closing Above Previous High for 3 Days Closing Below Previous Low For 3 Days coal India Cup & Handle Pattern Daily Life of a Trader dark cloud cover Day Trading Breakout Day Trading Setups Day Trading Setups – 6 Classic Formations Day Trading Strategy DBLHC Descending Triangle Divergence Price Action Strategy DIVI'S Laboratories Ltd Doji Candlestick Patterns Dojis Double EMA Dr Reddy Dr. Reddy's Laboratories Limited Early Morning Range Breakouts – 4 Trading Strategies EMA Equity Market EXHAUSTION BAR Falling Wedges (26th Dec 2017) Federal Bank fibonacci Fibonacci Retracement Fibonacci Retrenchment Strategy Fibonacci swing trading strategy Flag Pattern Strategy Flash Pattern Forex Trading Strategies Fyers Account Gandhi Jayanti Gap Up Gartley Pattern Glenmark Pharmaceuticals Limited godrej Godrej Consumer Products Limited Godrej India Gppl Happy Birthday Happy Chhath Puja Happy Diwali Happy Diwali (2017) Happy Diwali (2018) Happy Dussehra Happy Ganesh Chaturthi Happy Holi Happy Independence Day 2017 Happy Janmashtami Happy Krishna Janmashtami 2017 Happy Muharram 2017 Happy Navratri To All Happy Teacher Day Harmonic Pattern HCL Technology HDFC HDFC Bank Head & Shoulders breakout Head & Shoulders Pattern (6th Oct 2017) Head and Shoulders Pattern Higher high of 3 days Hikkake Pattern Hindustan Petrolium Hindustan Unilever Hindustan Unilever Limited HOW TO DRAW TRENDLINES How To Trade Supply And Demand IndusInd Bank Indusind Bank Ltd Infosys INSIDE BAR Inside Bar - Outside Bar Inside Bar Trading Strategy by Stock Alphabets Inside Day Bar Intraday Intraday strategy Intraday strategy with Camarilla Equition intraday SureShot Intraday SureShot Official Post Intraday Trading Strategy Intraday/Day Trading Strategy inverted Head & Shoulders Irb Infrastructure Developers Limited Iron Condor Iron Fly Island Reversal Pattern Trading Strategy Jindal Steel & Power Limited Jk Lakshmi Cement Limited Jubilant Food Jubilant Foodworks Limited Kajaria Ceramics KEY REVERSAL BAR Kingfa Science and Technolgy (India) Ltd Kotak Mahindra Bank Limited Larson & Tarbo LIC LIC Housing Finance Limited Live Trading Lupin Limited M & M Finance Mahanagar gas Making Higher High for 3 Days Making Lower Lows for 3 Days Master Candle Master Candle Strategy Master Plus Candlesticks Meditation Mind Tree Mindtree Mobile App & Website for share market Momentum Divergence Strategy Morning and Evening Stars Moving Average Strategy My 10 price action secrets Naked Options NBCC (India) Limited New Mobile Application Annoucement NHPC Nifty Trend (12th August 2017) Nifty Trend line (10th August 2017) NMDC NMDC Cup & Handle Pattern NR7 NTPC Nureca Limited IPO Option Strangle (Long Strangle) Options Strategy Newsletter OUTSIDE BAR Outside Bar-Inside Bar Combo Pattern Pattern Strategy PATTERNS Pidilite India PINOCCHIO BAR (PIN BAR) PINOCCHIO BAR TRADE SETUP (PIN BAR) Piramal Enterprises Limited planting trees PNB POPGUN BAR PATTERN Price action Price Action Candlestick Patterns Price Action Continuation Patterns Price Action PATTERN # 6: Pin Bars PRICE ACTION PATTERN #1: DBLHC Price Action PATTERN #4: BEOVB Price Action PATTERN #5: BUOVB Price Action Patterns Price Action Pivot Point Strategy Price Action Sandwich Trading Setup Price Action Strategy Price Action Strategy Guide Price Action Strategy lover Price Action Trading Class Price Action Trading Course Price action trading strategy Price came back channel from bottom Price came back channel from Top Price gone below mid line Price-action-trading-strategies #Chapter-01 Price-action-trading-strategies-#Chapter-02 price-action-trading-strategies-#Chapter-03 Price-action-trading-strategies-#chapter-04 Profitable Level Profitable Level (13th Dec 2017) Profitable Level (14th Dec 2017) Profitable Level (15th Dec 2017) Profitable Level (18th Dec 2017) Profitable Level (18th Sept 2017) Profitable Pattern Profitable Trader Profitable Traders Do Nothing 99% Of the Time PVR RailTel IPO Ratio Spread Raymond Limited Reliance Capital Reliance Infra Repco Home Finance REVERSAL BAR PATTERN Risk/Reward Ross Hook Pattern Trading Strategy RSI RSI Divergence Strategy SBI Shooting Six Candle Concepts SMA Sodha Spring at Support & Resistance State Bank of India Stock Alphabets Stock Market Stock Market & Finance Movies Stock Market Strategy StockAlphabets Stop Loss Order Straddle Strangle Strategy EMA Strategy Resource Strip/ Strap sun Pharma Sun Pharmaceuticals Industries Limited Supertrend Supertrend Strategy support & Resistance Support & Resistance (25th Sept 2017) Support & Resistance (26th Dec 2017) Support & Resistance Strategy (6th Dec 2017) Support and Resistance Swerve pattern Swing Trading Strategies Swing Trading Strategy Tata Chemical Tata Global Beverages Tata Motors TCS The Best Stocks to Buy Now or Whenever The India Cements Limited The Outside Bar Trading Strategy Three Bar Reversal Three Candle Formation THREE-BAR PULLBACK Titan Company Limited Top Indian Companies with Monopoly Top 10 Continuation Candlesticks TOP 10 PRICE ACTION TRADING BOOKS Top 10 Reversal Candlesticks Top Monopoly stocks in India Torrent Torrent Pharmaceuticals Traders Trick Entry Trading System trading breakout Trading Key Reversal Bar Trading Psychology Trading Strategy Trading Strategy For Posstional & Intraday Trading System Trading the trend Trend line (25th Sept 2017) Trend line Strategy Trend line Strategy (14th Dec 2017) Trend Trading Analysis Prediction Trend-line Strategy (30th Nov 2017) Trendline Trendline (19th Sept 2017) Trendline (6th Nov 2017) Trendline Line Strategy Trendline strategy Trendline Strategy (19th Dec 2017) Trendline Strategy (2nd Dec 2017) Trendline Strategy (6th Dec 2017) Triagle Pattern TV18 Broadcast Limited TWO-BAR REVERSAL Types of Trader TYPICAL PRICE Typical Price Action Strategy ubl UBL Breakout Ujjivan Ujjivan Financial Services United Breweries Limited United Phosphorus Ltd Vertical Spread Volume Candlesticks Volume Trading Intraday Strategy W Pattern Wedge Pattern Strategy Wedges Price Action Strategy(16th Dec 2017) wedges Strategy (19th Dec 2017) Wipro Limited Wockhardt Limited Wolf Wave Strategy World’s Best Traders www.StockAlphabets.com Yes Bank Zee Entertainment Enterprises Limited Zydus Wellness

Travel

3/Travel/custom-widget

Comments

3/recentcomments

Ads

An�ncio

Latest in Sports

Sports

Random Posts

4/randomposts

Facebook

[Latest News][6]

#1 Live Trading on Glenmark Pharmaceuticals Ltd
#1 Live Trading on Godrej Industries Limited
#3 Live Trading Session
1-2-3 Strategy
1-2-3-4 Reversal Trading Strategy
10 CHART PATTERNS FOR PRICE ACTION TRADING
10 Habits of successful traders
10 Performing Candlesticks
10 PRICE ACTION BAR PATTERNS YOU MUST KNOW
10 PRICE ACTION CANDLESTICK PATTERNS YOU MUST KNOW
10 Things You Can Learn From The World’s Best Traders
10 TYPES OF PRICE CHARTS FOR TRADING
123 forex trading strategy
123 Trading Strategy
200 SMA
3 Bar Net Line Strategy
6 Best Price Action Trading Strategies
7 RSI TRADING STRATEGIES
9 Advanced & Profitable Trading Strategy
9 Funny Facial Expressions
AB = CD Price Action Strategy
Abb India Limited
Aditya Birla Nuvo Limited
Aditya Birla Nuvo Ltd
ADVANCED REVERSAL STRATEGY
Alice Blue Opening Link
Alphabets
Amaraja Battries
Ambuja Cement
Anupam Rasayan India Limited IPO
Asian Paint Ltd
Aurobindo Pharma Limited
Bajaj-Auto
Bearish Crossover
Bearish Engulfing
Bearish Engulfing Candle
Bearish Reversal (Red-Red)
BEML Ltd
Best Stock Market Strategy
Bharat Finance Inclusion
Blood Rain Pattern
bollinger band
Bollinger Band Price goes below Mid line Strategy
Bollinger Band Price gone above mid line
Bollinger Band Strategy
Breakout Stock Trading Strategy
Bullish Crossover
Bullish Engulfing
Bullish Gartley Pattern Strategy
Bullish Three Bar Reversal
Butterfly Spread
Cadila Healthcare Limited
Calendar Spread
Camarilla Equition
canara Bank
Candlestick Charts
Candlestick Patterns
Candlestick Patterns Strategy
Cesc Limited
Chart Patterns
Cipla
Closing Above Previous High for 3 Days
Closing Below Previous Low For 3 Days
coal India
Cup & Handle Pattern
Daily Life of a Trader
dark cloud cover
Day Trading Breakout
Day Trading Setups
Day Trading Setups – 6 Classic Formations
Day Trading Strategy
DBLHC
Descending Triangle
Divergence Price Action Strategy
DIVI'S Laboratories Ltd
Doji Candlestick Patterns
Dojis
Double EMA
Dr Reddy
Dr. Reddy's Laboratories Limited
Early Morning Range Breakouts – 4 Trading Strategies
EMA
Equity Market
EXHAUSTION BAR
Falling Wedges (26th Dec 2017)
Federal Bank
fibonacci
Fibonacci Retracement
Fibonacci Retrenchment Strategy
Fibonacci swing trading strategy
Flag Pattern Strategy
Flash Pattern
Forex Trading Strategies
Fyers Account
Gandhi Jayanti
Gap Up
Gartley Pattern
Glenmark Pharmaceuticals Limited
godrej
Godrej Consumer Products Limited
Godrej India
Gppl
Happy Birthday
Happy Chhath Puja
Happy Diwali
Happy Diwali (2017)
Happy Diwali (2018)
Happy Dussehra
Happy Ganesh Chaturthi
Happy Holi
Happy Independence Day 2017
Happy Janmashtami
Happy Krishna Janmashtami 2017
Happy Muharram 2017
Happy Navratri To All
Happy Teacher Day
Harmonic Pattern
HCL Technology
HDFC
HDFC Bank
Head & Shoulders breakout
Head & Shoulders Pattern (6th Oct 2017)
Head and Shoulders Pattern
Higher high of 3 days
Hikkake Pattern
Hindustan Petrolium
Hindustan Unilever
Hindustan Unilever Limited
HOW TO DRAW TRENDLINES
How To Trade Supply And Demand
IndusInd Bank
Indusind Bank Ltd
Infosys
INSIDE BAR
Inside Bar - Outside Bar
Inside Bar Trading Strategy by Stock Alphabets
Inside Day Bar
Intraday
Intraday strategy
Intraday strategy with Camarilla Equition
intraday SureShot
Intraday SureShot Official Post
Intraday Trading Strategy
Intraday/Day Trading Strategy
inverted Head & Shoulders
Irb Infrastructure Developers Limited
Iron Condor
Iron Fly
Island Reversal Pattern Trading Strategy
Jindal Steel & Power Limited
Jk Lakshmi Cement Limited
Jubilant Food
Jubilant Foodworks Limited
Kajaria Ceramics
KEY REVERSAL BAR
Kingfa Science and Technolgy (India) Ltd
Kotak Mahindra Bank Limited
Larson & Tarbo
LIC
LIC Housing Finance Limited
Live Trading
Lupin Limited
M & M Finance
Mahanagar gas
Making Higher High for 3 Days
Making Lower Lows for 3 Days
Master Candle
Master Candle Strategy
Master Plus Candlesticks
Meditation
Mind Tree
Mindtree
Mobile App & Website for share market
Momentum Divergence Strategy
Morning and Evening Stars
Moving Average Strategy
My 10 price action secrets
Naked Options
NBCC (India) Limited
New Mobile Application Annoucement
NHPC
Nifty Trend (12th August 2017)
Nifty Trend line (10th August 2017)
NMDC
NMDC Cup & Handle Pattern
NR7
NTPC
Nureca Limited IPO
Option Strangle (Long Strangle)
Options Strategy Newsletter
OUTSIDE BAR
Outside Bar-Inside Bar Combo Pattern
Pattern Strategy
PATTERNS
Pidilite India
PINOCCHIO BAR (PIN BAR)
PINOCCHIO BAR TRADE SETUP (PIN BAR)
Piramal Enterprises Limited
planting trees
PNB
POPGUN BAR PATTERN
Price action
Price Action Candlestick Patterns
Price Action Continuation Patterns
Price Action PATTERN # 6: Pin Bars
PRICE ACTION PATTERN #1: DBLHC
Price Action PATTERN #4: BEOVB
Price Action PATTERN #5: BUOVB
Price Action Patterns
Price Action Pivot Point Strategy
Price Action Sandwich Trading Setup
Price Action Strategy
Price Action Strategy Guide
Price Action Strategy lover
Price Action Trading Class
Price Action Trading Course
Price action trading strategy
Price came back channel from bottom
Price came back channel from Top
Price gone below mid line
Price-action-trading-strategies #Chapter-01
Price-action-trading-strategies-#Chapter-02
price-action-trading-strategies-#Chapter-03
Price-action-trading-strategies-#chapter-04
Profitable Level
Profitable Level (13th Dec 2017)
Profitable Level (14th Dec 2017)
Profitable Level (15th Dec 2017)
Profitable Level (18th Dec 2017)
Profitable Level (18th Sept 2017)
Profitable Pattern
Profitable Trader
Profitable Traders Do Nothing 99% Of the Time
PVR
RailTel IPO
Ratio Spread
Raymond Limited
Reliance Capital
Reliance Infra
Repco Home Finance
REVERSAL BAR PATTERN
Risk/Reward
Ross Hook Pattern Trading Strategy
RSI
RSI Divergence Strategy
SBI
Shooting
Six Candle Concepts
SMA
Sodha
Spring at Support & Resistance
State Bank of India
Stock Alphabets
Stock Market
Stock Market & Finance Movies
Stock Market Strategy
StockAlphabets
Stop Loss Order
Straddle
Strangle
Strategy EMA
Strategy Resource
Strip/ Strap
sun Pharma
Sun Pharmaceuticals Industries Limited
Supertrend
Supertrend Strategy
support & Resistance
Support & Resistance (25th Sept 2017)
Support & Resistance (26th Dec 2017)
Support & Resistance Strategy (6th Dec 2017)
Support and Resistance
Swerve pattern
Swing Trading Strategies
Swing Trading Strategy
Tata Chemical
Tata Global Beverages
Tata Motors
TCS
The Best Stocks to Buy Now or Whenever
The India Cements Limited
The Outside Bar Trading Strategy
Three Bar Reversal
Three Candle Formation
THREE-BAR PULLBACK
Titan Company Limited
Top Indian Companies with Monopoly
Top 10 Continuation Candlesticks
TOP 10 PRICE ACTION TRADING BOOKS
Top 10 Reversal Candlesticks
Top Monopoly stocks in India
Torrent
Torrent Pharmaceuticals
Traders Trick Entry Trading System
trading breakout
Trading Key Reversal Bar
Trading Psychology
Trading Strategy
Trading Strategy For Posstional & Intraday
Trading System
Trading the trend
Trend line (25th Sept 2017)
Trend line Strategy
Trend line Strategy (14th Dec 2017)
Trend Trading Analysis Prediction
Trend-line Strategy (30th Nov 2017)
Trendline
Trendline (19th Sept 2017)
Trendline (6th Nov 2017)
Trendline Line Strategy
Trendline strategy
Trendline Strategy (19th Dec 2017)
Trendline Strategy (2nd Dec 2017)
Trendline Strategy (6th Dec 2017)
Triagle Pattern
TV18 Broadcast Limited
TWO-BAR REVERSAL
Types of Trader
TYPICAL PRICE
Typical Price Action Strategy
ubl
UBL Breakout
Ujjivan
Ujjivan Financial Services
United Breweries Limited
United Phosphorus Ltd
Vertical Spread
Volume Candlesticks
Volume Trading Intraday Strategy
W Pattern
Wedge Pattern Strategy
Wedges Price Action Strategy(16th Dec 2017)
wedges Strategy (19th Dec 2017)
Wipro Limited
Wockhardt Limited
Wolf Wave Strategy
World’s Best Traders
www.StockAlphabets.com
Yes Bank
Zee Entertainment Enterprises Limited
Zydus Wellness

Long Straddle

 

Long Straddle

Market view: Mixed

It  is a strategy which involves buying both a CALL and a PUT on the same stock with both the option having same exercise price

CALL (CE) Buy + PUT (PE) Buy

A long straddle consists of one long call and one long put. Both options have the same underlying stock, the same strike price and the same expiration date. A long straddle is established for a net debit (or net cost) and profits if the underlying stock rises above the upper break-even point or falls below the lower break-even point. Profit potential is unlimited on the upside and substantial on the downside. Potential loss is limited to the total cost of the straddle plus commissions.

Example of Long straddle

BUY XYZ 100 CE at 3.30

BUY XYZ 100 PE at 3.20

                  Net cost= 6.50


Maximum profit

Profit potential is unlimited on the upside, because the stock price can rise indefinitely. On the downside, profit potential is substantial, because the stock price can fall to zero.

Maximum risk

Potential loss is limited to the total cost of the straddle plus commissions, and a loss of this amount is realized if the position is held to expiration and both options expire worthless. Both options will expire worthless if the stock price is exactly equal to the strike price at expiration.

Breakeven stock price at expiration

There are two potential break-even points:

  1. Strike price plus total premium:
    In this example: 100.00 + 6.50 = 106.50
  2. Strike price minus total premium:
    In this example: 100.00 – 6.50 = 93.50

Profit/Loss diagram and table: long straddle

Long 1 100 call at(3.30)
Long 1 100 put at(3.20)
Net cost =(6.50)
Stock Price at ExpirationLong 100 Call Profit/(Loss) at ExpirationLong 100 Put Profit/(Loss) at ExpirationLong Straddle Profit / (Loss) at Expiration
110+6.70(3.20)+3.50
109+5.70(3.20)+2.50
108+4.70(3.20)+1.50
107+3.70(3.20)+0.50
106+2.70(3.20)(0.50)
105+1.70(3.20)(1.50)
104+0.70(3.20)(2.50)
103(0.30)(3.20)(3.50)
102(1.30)(3.20)(4.50)
101(2.30)(3.20)(5.50)
100(3.30)(3.20)(6.50)
99(3.30)(2.20)(5.50)
98(3.30)(1.20)(4.50)
97(3.30)(0.20)(3.50)
96(3.30)+0.80(2.50)
95(3.30)+1.80(1.50)
94(3.30)+2.80(0.50)
93(3.30)+3.80+0.50
92(3.30)+4.80+1.50
91(3.30)+5.80+2.50
90(3.30)+6.80+3.50

Appropriate market forecast

A long straddle profits when the price of the underlying stock rises above the upper breakeven point or falls below the lower breakeven point. The ideal forecast, therefore, is for a “big stock price change when the direction of the change could be either up or down.” In the language of options, this is known as “high volatility.”

Strategy discussion

A long – or purchased – straddle is the strategy of choice when the forecast is for a big stock price change but the direction of the change is uncertain. Straddles are often purchased before earnings reports, before new product introductions and before FDA announcements. These are typical of situations in which “good news” could send a stock price sharply higher, or “bad news” could send a stock price sharply lower. The risk is that the announcement does not cause a significant change in stock price and, as a result, both the call price and put price decrease as traders sell both options.

It is important to remember that the prices of calls and puts – and therefore the prices of straddles – contain the consensus opinion of options market participants as to how much the stock price will move prior to expiration. This means that buyers of straddles believe that the market consensus is “too low” and that the stock price will move beyond a breakeven point – either up or down.

The same logic applies to options prices before earnings reports and other such announcements. Dates of announcements of important information are generally publicized in advanced and well-known in the marketplace. Furthermore, such announcements are likely, but not guaranteed, to cause the stock price to change dramatically. As a result, prices of calls, puts and straddles frequently rise prior to such announcements. In the language of options, this is known as an “increase in implied volatility.”

An increase in implied volatility increases the risk of trading options. Buyers of options have to pay higher prices and therefore risk more. For buyers of straddles, higher options prices mean that breakeven points are farther apart and that the underlying stock price has to move further to achieve breakeven. Sellers of straddles also face increased risk, because higher volatility means that there is a greater probability of a big stock price change and, therefore, a greater probability that an option seller will incur a loss.

“Buying a straddle” is intuitively appealing, because “you can make money if the stock price moves up or down.” The reality is that the market is often “efficient,” which means that prices of straddles frequently are an accurate gauge of how much a stock price is likely to move prior to expiration. This means that buying a straddle, like all trading decisions, is subjective and requires good timing for both the buy decision and the sell decision.

Impact of stock price change

When the stock price is at or near the strike price of the straddle, the positive delta of the call and negative delta of the put very nearly offset each other. Thus, for small changes in stock price near the strike price, the price of a straddle does not change very much. This means that a straddle has a “near-zero delta.” Delta estimates how much an option price will change as the stock price changes.

However, if the stock price “rises fast enough” or “falls fast enough,” then the straddle rises in price. This happens because, as the stock price rises, the call rises in price more than the put falls in price. Also, as the stock price falls, the put rises in price more than the call falls. In the language of options, this is known as “positive gamma.” Gamma estimates how much the delta of a position changes as the stock price changes. Positive gamma means that the delta of a position changes in the same direction as the change in price of the underlying stock. As the stock price rises, the net delta of a straddle becomes more and more positive, because the delta of the long call becomes more and more positive and the delta of the put goes to zero. Similarly, as the stock price falls, the net delta of a straddle becomes more and more negative, because the delta of the long put becomes more and more negative and the delta of the call goes to zero.

Impact of change in volatility

Volatility is a measure of how much a stock price fluctuates in percentage terms, and volatility is a factor in option prices. As volatility rises, option prices – and straddle prices – tend to rise if other factors such as stock price and time to expiration remain constant. Therefore, when volatility increases, long straddles increase in price and make money. When volatility falls, long straddles decrease in price and lose money. In the language of options, this is known as “positive vega.” Vega estimates how much an option price changes as the level of volatility changes and other factors are unchanged, and positive vega means that a position profits when volatility rises and loses when volatility falls.

Impact of time

The time value portion of an option’s total price decreases as expiration approaches. This is known as time erosion, or time decay. Since long straddles consist of two long options, the sensitivity to time erosion is higher than for single-option positions. Long straddles tend to lose money rapidly as time passes and the stock price does not change.

Risk of early assignment

Owners of options have control over when an option is exercised. Since a long straddle consists of one long, or owned, call and one long put, there is no risk of early assignment.

Potential position created at expiration

There are three possible outcomes at expiration. The stock price can be at the strike price of a long straddle, above it or below it.

If the stock price is at the strike price of a long straddle at expiration, then both the call and the put expire worthless and no stock position is created.

If the stock price is above the strike price at expiration, the put expires worthless, the long call is exercised, stock is purchased at the strike price and a long stock position is created. If a long stock position is not wanted, the call must be sold prior to expiration.

If the stock price is below the strike price at expiration, the call expires worthless, the long put is exercised, stock is sold at the strike price and a short stock position is created. If a short stock position is not wanted, the put must be sold prior to expiration.

Note: options are automatically exercised at expiration if they are one cent ($0.01) in the money. Therefore, if the stock price is “close” to the strike price as expiration approaches, and if the owner of a straddle wants to avoid having a stock position, the long straddle must be sold prior to expiration.

Other considerations

Long straddles are often compared to long strangles, and traders frequently debate which the “better” strategy is.

Long straddles involve buying a call and put with the same strike price. For example, buy a 100 Call and buy a 100 Put. Long strangles, however, involve buying a call with a higher strike price and buying a put with a lower strike price. For example, buy a 105 Call and buy a 95 Put.

Neither strategy is “better” in an absolute sense. There are tradeoffs.

There are three advantages and two disadvantages of a long straddle. The first advantage is that the breakeven points are closer together for a straddle than for a comparable strangle. Second, there is less of a change of losing 100% of the cost of a straddle if it is held to expiration. Third, long straddles are less sensitive to time decay than long strangles. Thus, when there is little or no stock price movement, a long straddle will experience a lower percentage loss over a given time period than a comparable strangle. The first disadvantage of a long straddle is that the cost and maximum risk of one straddle (one call and one put) are greater than for one strangle. Second, for a given amount of capital, fewer straddles can be purchased.

The long strangle two advantages and three disadvantages. The first advantage is that the cost and maximum risk of one strangle are lower than for one straddle. Second, for a given amount of capital, more strangles can be purchased. The first disadvantage is that the breakeven points for a strangle are further apart than for a comparable straddle. Second, there is a greater chance of losing 100% of the cost of a strangle if it is held to expiration. Third, long strangles are more sensitive to time decay than long straddles. Thus, when there is little or no stock price movement, a long strangle will experience a greater percentage loss over a given time period than a comparable straddle.