The long straddle takes advantage of stocks moving in either direction. The short and long straddles are different in the way they respond to movement in the market. They are both neutral because the trader does not have a preference about the direction of the stocks.
The long straddle is used by traders and investors when they feel that a particular stock is about to make a significant move. With this anticipated significant move, traders see an opportunity to make money by using the long straddle. This is done by purchasing the puts and calls of the same number. Thus, taking advantage of the directions of the stocks.
For example, stock ABC is trading at $160. To take advantage of the anticipated move in either direction, you will buy both 160 calls and 160 puts. If the price of the stocks drop to $100, your put will be $60, the call will be 0. If the stock is $110, the call will be $60 and the put will be 0. The risk is if the stock remains at $160 since the options will expire without value.
|Buy 1 80 Call @ $15.00||$1,500.00|
|Buy 1 80 Put @ $14.00||$1,400.00|
The straddle now costs $29, for both the options. You can actually find better price than this example, but here the $29 you pay for the options is the most that you will lose if the price of the stocks remain close to $160. The breakeven points are as follows:
Upside breakeven: Straddle Strike + Cost of Straddle
Downside breakeven: Straddle Strike – Cost of Straddle
You can see therefore that you will profit if the stock moves up or down between the prices.
|Bullish Strategies||Neutral Strategies||Bearish Strategies|