What is an Options Straddle?

What is an Options Straddle?
ad



An Options Straddle is created when we buy (or sell) one call option + one put option at the same strike price and same expiration date. When we buy the call + put option, we create a long straddle, and when we sell a call + put option, we create a short straddle.

Options Straddle: What is a Long Straddle?

A Long Option Straddle is created by buying a call and a put option with the same expiration date and same strike price. In the example above, we are buying an AAPL $150 strike call + an AAPL $150 strike put – both with the same expiration date of 21 Jan 2022.

Is Long Straddle a Net Debit or Net Credit Trade?

Since we need to pay premium to buy both the call and put options, a long straddle is a net debit trade. In the example, we are paying $13.35 to buy the $150 strike put and $9.70 to buy the $150 call i.e. a total of $23.05/per share or $2,305.00 for the long straddle (100 shares).

ad


What is the Maximum Profit in a Long Straddle?

The maximum profit in a long straddle is unlimited because it contains a long call option. If the stock price skyrockets, the profitability of call option (hence the long straddle) is practically unlimited.

What is the Maximum Loss in a Long Straddle?

The maximum loss in a long straddle is limited to the net debit paid to create the straddle. In this example the maximum loss is $23/share or $2,300 for the straddle (100 shares).

What is the Breakeven Point of a Long Straddle?

Long Straddle has two breakeven points, one in either direction of the strike price. The breakeven points are

ad


  • lower breakeven point = strike price – |net debit|
  • and, higher breakeven point = strike price + |net debit|

The long straddle is profitable above the higher breakeven point AND below the lower breakeven point.

Long Straddle: Zones of Profit and Loss

long straddle profit and loss
View on Tableau

The maximum loss in a long straddle is observed when the stock price = the strike price. The loss reduces as the stock price moves away from the strike price in either direction. The long straddle becomes profitable when the stock price goes below the lower breakeven point or goes above the higher breakeven point.

In this example, the maximum loss is $23/share or $2,300. The maximum profit is unlimited, when the stock price goes up and above the higher breakeven point. The profit is limited to $127/share if the stock price goes below the lower breakeven point, down to $0/share.


What is an Options Straddle?

Options Straddle: What is a Short Straddle?

A Short Option Straddle is created by selling a call and a put option with the same expiration date and same strike price. In the example above, we are selling an AAPL $150 strike call + an AAPL $150 strike put – both with the same expiration date of 21 Jan 2022.

Is Short Straddle a Net Debit or Net Credit Trade?

Since we collect premium when we sell both the call and put options, a short straddle is a net credit trade. In the example, we are collecting $13.35 while writing the $150 strike put and $9.70 while writing the $150 call i.e. a total of $23.05/per share or $2,305.00 for the short straddle (100 shares).

What is the Maximum Profit in a Short Straddle?

The maximum profit in a short straddle is limited to the net credit, i.e. $23/share in our example.

What is the Maximum Loss in a Short Straddle?

The maximum loss in a short straddle is practically unlimited. Because we are selling a call option, if the stock price skyrockets, the sold call option can bring us huge losses.

What is the Breakeven Point of a Short Straddle?

Short Straddle has two breakeven points, one in either direction of the strike price. The breakeven points are

  • lower breakeven point = strike price – |net credit|
  • and, higher breakeven point = strike price + |net credit|

The short straddle is profitable in between the higher breakeven point and the lower breakeven point.

Short Straddle: Zones of Profit and Loss

short straddle profit and loss
View on Tableau

The maximum profit in a short straddle is observed when the stock price = the strike price. The profit reduces as the stock price moves away from the strike price in either direction. The short straddle loses money when the stock price goes below the lower breakeven point or goes above the higher breakeven point.

In this example, the maximum profit is $23/share or $2,300. The maximum loss is unlimited, when the stock price goes up and above the higher breakeven point. The loss is limited to $127/share if the stock price goes below the lower breakeven point, down to $0/share.


Fresh from the Blog

Read more: Stock Options, Call Options, Put Options, Levels in Options Trading

StartOptions Home Page | StartOptions BLOG Page
Useful Tools: Student Loan Payoff Calculator | Mortgage Payoff Calculator
FinPins Home Page | FinPins BLOG Page

what is an options straddle
ad